Agricultural Marketing Service
Animal and Plant Health Inspection Service
Committee for Purchase From People Who Are Blind or Severely Disabled
Foreign-Trade Zones Board
International Trade Administration
National Oceanic and Atmospheric Administration
Defense Acquisition Regulations System
Federal Energy Regulatory Commission
Management and Budget Office
Centers for Medicare & Medicaid Services
Children and Families Administration
Food and Drug Administration
National Institutes of Health
Coast Guard
Fish and Wildlife Service
Indian Affairs Bureau
Land Management Bureau
Alcohol, Tobacco, Firearms, and Explosives Bureau
Employment Standards Administration
Management and Budget Office
Federal Motor Carrier Safety Administration
Surface Transportation Board
Comptroller of the Currency
Thrift Supervision Office
Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, reminders, and notice of recently enacted public laws.
To subscribe to the Federal Register Table of Contents LISTSERV electronic mailing list, go to http://listserv.access.gpo.gov and select Online mailing list archives, FEDREGTOC-L, Join or leave the list (or change settings); then follow the instructions.
Animal and Plant Health Inspection Service, USDA.
Interim rule and request for comments.
We are amending the Mediterranean fruit fly regulations by adding portions of Santa Clara and Solano Counties, CA, to the list of quarantined areas and restricting the interstate movement of regulated articles from those areas. We are also amending the definitions of the terms
This interim rule is effective December 7, 2007. We will consider all comments that we receive on or before February 5, 2008.
You may submit comments by either of the following methods:
•
•
Mr. Wayne D. Burnett, Domestic Coordinator, Fruit Fly Exclusion and Detection Programs, PPQ, APHIS, 4700 River Road Unit 137, Riverdale, MD 20737-1234; (301) 734-4387.
The Mediterranean fruit fly (Medfly,
The Mediterranean fruit fly regulations, contained in 7 CFR 301.78 through 301.78-10 (referred to below as the regulations), were established to prevent the spread of Medfly into noninfested areas of the United States. Section 301.78-3(a) provides that the Administrator will list as a quarantined area each State, or each portion of a State, in which Medfly has been found by an inspector, in which the Administrator has reason to believe that Medfly is present, or that the Administrator considers necessary to regulate because of its inseparability for quarantine enforcement purposes from localities in which Medfly has been found. The regulations impose restrictions on the interstate movement of regulated articles from the quarantined areas. Quarantined areas are listed in § 301.78-3(c).
Less than an entire State will be designated as a quarantined area only if the Administrator determines that: (1) The State has adopted and is enforcing restrictions on the intrastate movement of the regulated articles that are substantially the same as those imposed on the interstate movement of regulated articles and (2) the designation of less than the entire State as a quarantined area will prevent the interstate spread of Medfly.
Recent trapping surveys by inspectors of California State and county agencies have revealed that portions of Santa Clara and Solano Counties, CA, are infested with Medfly.
State agencies in California have begun an intensive Medfly eradication program in the quarantined areas in Santa Clara and Solano Counties. Also, California has taken action to restrict the intrastate movement of regulated articles from the quarantined areas.
Accordingly, to prevent the spread of Medfly into noninfested areas of the United States, we are amending the regulations in § 301.78-3 by designating portions of Santa Clara and Solano Counties, CA, as quarantined areas for Medfly. The quarantined areas are described in the regulatory text at the end of this document.
Section 301.78-1 of the regulations currently defines the term
The regulations currently define the term
We are also adding blueberries (
This rulemaking is necessary on an emergency basis to prevent Medfly from spreading to noninfested areas of the United States. Under these circumstances, the Administrator has determined that prior notice and opportunity for public comment are contrary to the public interest and that there is good cause under 5 U.S.C. 553 for making this rule effective less than 30 days after publication in the
We will consider comments we receive during the comment period for this interim rule (see
This rule has been reviewed under Executive Order 12866. For this action, the Office of Management and Budget has waived its review under Executive Order 12866.
This rule amends the Medfly regulations by adding portions of Santa Clara and Solano Counties, CA, to the list of quarantined areas. The regulations restrict the interstate movement of regulated articles from the quarantined areas. Within the quarantined areas there are approximately 251 small entities that may be affected by this rule. These include 125 markets (including swap meets and farmer's markets), 53 growers, 24 shippers, 23 nurseries, 17 yard maintenance firms, 8 packers/processors, and 1 green waste hauler. These 251 entities comprise less than 1 percent of the total number of similar entities operating in the State of California. Additionally, few of these small entities move regulated articles interstate during the normal course of their business, nor do consumers of products purchased from those entities generally move those products interstate.
The effect on those few entities that do move regulated articles interstate will be minimized by the availability of various treatments that, in most cases, will allow these small entities to move regulated articles interstate with very little additional cost.
Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action will not have a significant economic impact on a substantial number of small entities.
This program/activity is listed in the Catalog of Federal Domestic Assistance under No. 10.025 and is subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. (See 7 CFR part 3015, subpart V.)
This rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule: (1) Preempts all State and local laws and regulations that are inconsistent with this rule; (2) has no retroactive effect; and (3) does not require administrative proceedings before parties may file suit in court challenging this rule.
This rule contains no new information collection or recordkeeping requirements under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Agricultural commodities, Plant diseases and pests, Quarantine, Reporting and recordkeeping requirements, Transportation.
7 U.S.C. 7701-7772 and 7781-7786; 7 CFR 2.22, 2.80, and 371.3.
Section 301.75-15 issued under Sec. 204, Title II, Public Law 106-113, 113 Stat. 1501A-293; sections 301.75-15 and 301.75-16 issued under Sec. 203, Title II, Public Law 106-224, 114 Stat. 400 (7 U.S.C. 1421 note).
(c) The areas described below are designated as quarantined areas:
Agricultural Marketing Service, USDA.
Interim final rule with request for comments.
This rule changes the handling requirements currently authorized under the California pistachio marketing order (order). The order regulates the handling of pistachios grown in California and is administered locally by the Administrative Committee for Pistachios (committee). This rule suspends the minimum quality requirements, including maximum defects and minimum sizes, for California pistachios. This will reduce handler costs and provide handlers more flexibility in meeting customer needs.
Effective December 10, 2007; comments received by February 5, 2008 will be considered prior to issuance of a final rule.
Interested persons are invited to submit written comments concerning this rule. Comments must be sent to the Docket Clerk, Marketing Order Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 1400 Independence Avenue, SW., STOP 0237, Washington, DC 20250-0237; Fax: (202) 720-8938; or Internet:
Terry Vawter, Senior Marketing Specialist, or Kurt J. Kimmel, Regional Manager, California Marketing Field Office, Marketing Order Administration Branch, Fruit and Vegetable Programs, AMS, USDA; Telephone: (559) 487-5901, Fax: (559) 487-5906, or Email:
Small businesses may request information on complying with this regulation by contacting Jay Guerber, Marketing Order Administration Branch, Fruit and Vegetable Programs, AMS, USDA, 1400 Independence Avenue, SW., STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or E-mail:
This rule is issued under Marketing Order No. 983 (7 CFR part 983), regulating the handling of pistachios grown in California, hereinafter referred to as the “order.” The order is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.”
The Department of Agriculture (USDA) is issuing this rule in conformance with Executive Order 12866.
This rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule is not intended to have retroactive effect. This rule will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule.
The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on
This rule changes the handling requirements for pistachios currently authorized under the order. This rule suspends the minimum quality requirements, including maximum defects and minimum sizes, for California pistachios. This will reduce handler costs and provide handlers more flexibility in meeting customer needs. This action was recommended by the committee.
Section 983.39 establishes minimum quality levels for pistachios, including maximum defects and minimum sizes permitted under the order. Under § 983.46, the Secretary may modify, suspend, or make rules and regulations to implement §§ 983.38 through 983.45 based upon a recommendation by seven concurring committee members or other available information.
The quality and size requirements have been in effect for California pistachios since the order's inception in 2004. Evidence provided at the promulgation hearing suggested that there was a direct link between lower-quality pistachios and the incidence of aflatoxin contamination (see 68 FR 45990). Aflatoxin is one of a group of mycotoxins produced by the molds
As further data was collected in 2005 and 2006, University of California researchers concluded that variability in aflatoxin levels seen in previous studies may have been due to geographic variability
Additionally, growers and handlers are reporting unexpected problems with the size of pistachios this season, as well as with staining of the nut shell from the hull. Pistachios are smaller than usual, and the large crop has resulted in a large percentage of pistachios which may not meet the requirements of the order because the sizes are smaller than currently authorized, which is 30/64ths of an inch. Staining is a problem this season due to unseasonable humidity and spotty rains on August 26th and 30th. The moisture wet the outer hull, and the hull then stained the pistachio shell. Dark stains are an external defect, which affects overall pistachio quality.
Thus, the committee recommended suspending the minimum quality requirements, which include maximum defects and minimum sizes, under the order. This will reduce handler costs and provide handlers more flexibility in meeting customer needs. Suspending these requirements also necessitates modifications to other sections of the order and regulations that reference minimum quality and size requirements. Accordingly, this rule partially suspends or amends language in §§ 983.6, 983.7, 983.31, 983.38, 983.40, 983.41, 983.42, 983.45, 983.138, 983.143, and 983.147 of the order; and suspends §§ 983.19, 983.20, 983.39, and 983.141 in their entirety.
Additionally, the third sentence in § 983.11(b), and all of § 983.71 are removed because the committee's State counterpart, the California Pistachio Commission, has been terminated and there is currently no relationship between the two organizations.
Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA), Agricultural Marketing Service (AMS) has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of business subject to such actions in order that small businesses would not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and the rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf.
There are approximately 740 producers in the production area, and 50 handlers of California pistachios subject to regulation. The Small Business Administration (SBA) (13 CFR 121.201) defines small agricultural producers as those having annual receipts less than $750,000, and defines small agricultural service firms those whose annual receipts are less than $6,500,000. Of the 740 producers, approximately 722 have annual receipts of less than $750,000. Forty-two of the 50 handlers subject to regulation have annual pistachio receipts of less than $6,500,000. Thus, the majority of producers and handlers of California pistachios may be classified as small entities.
This rule changes the handling requirements authorized under the order. This rule suspends the minimum quality requirements, including maximum defects and minimum sizes, for California pistachios. Authority for this action is provided in § 983.46.
Regarding the impact on affected entities, suspending the minimum quality requirements will decrease handler inspection costs. The committee currently estimates that the direct costs to obtain inspection average approximately $50.00 per lot. The average lot is approximately 44,000 pounds. With over 100,000,000 pounds shipped domestically, the direct costs for inspection for approximately 2,300 lots could total $115,000 for the industry. The direct costs do not include handler staff time in preparing samples, and handler storage and recordkeeping costs associated with inspected pistachios.
The committee considered alternatives to suspending the minimum quality requirements. Some producers were concerned that this could give handlers too much latitude in their operations. Other producers commented that handlers' customers would likely dictate product quality and prevent shipment of substandard pistachios into the market. Ultimately, the majority of committee members supported the changes.
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the form ACP-5, “Minimal Testing” being suspended by this rule was previously approved by the Office of Management and Budget and assigned OMB No. 0581-0215, Pistachios Grown in California, for 1 burden hour. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies.
AMS is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.
USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this rule.
Further, the committee meetings where this action was discussed were widely publicized throughout the pistachio industry and all interested persons were encouraged to attend the meetings and participate in the committee's deliberations. Like all committee meetings, these were public meetings, and entities of all sizes were encouraged to express their views on these issues. Finally, interested persons are invited to submit comments on this interim final rule, including the regulatory and informational impacts of this action on small businesses.
A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at:
This rule invites comments on changes to the handling requirements currently prescribed under the order. Any comments received will be considered prior to finalization of this rule.
The order provisions suspended by this action no longer tend to effectuate the declared policy of the Act. Accordingly, after consideration of all relevant material presented, including the committee's recommendation, and other information, it is found that this interim final rule, as hereinafter set forth, will effectuate the declared policy of the Act.
Pursuant to 5 U.S.C. 553, it is also found and determined upon good cause that it is impracticable, unnecessary, and contrary to the public interest to give preliminary notice prior to putting this rule into effect and that good cause exists for not postponing the effective date of this rule until 30 days after publication in the
Pistachios, Marketing agreements and orders, Reporting and recordkeeping requirements.
7 U.S.C. 601-674.
Prior to testing, a sample shall be drawn from each lot to be used to test pistachios for aflatoxin. The lot sample shall be of sufficient weight to comply with Tables 1 and 2 of § 983.38.
(a) * * *
(b) Each handler who handles pistachios shall cause any lot or portion of a lot initially certified for aflatoxin, and subsequently materially changed, to be reinspected for aflatoxin and certified as a new lot or new lots:
(a)
Food and Drug Administration, HHS.
Final rule.
The Food and Drug Administration (FDA) is amending the animal drug regulations to reflect approval of a supplemental new animal drug application (NADA) filed by Cross Vetpharm Group Ltd. The supplemental NADA provides for use of a 100 milligram per milliliter (mg/mL) strength erythromycin injectable solution in cattle for the treatment of bovine respiratory disease.
This rule is effective December 7, 2007.
John K. Harshman, Center for Veterinary Medicine (HFV-104), Food and Drug Administration, 7500 Standish Pl., Rockville, MD 20855, 301-827-0169, e-mail:
Cross Vetpharm Group Ltd., Broomhill Rd., Tallaght, Dublin 24, Ireland, filed a supplement to NADA 12-123 for GALLIMYCIN-100 (erythromycin) Injection. The supplemental NADA provides for use of a 100 mg/mL strength erythromycin injectable solution in cattle for the treatment of bovine respiratory disease. The supplemental NADA is approved as of November 15, 2007, and the regulations in 21 CFR 522.820 are amended to reflect the approval and a current format.
In accordance with the freedom of information provisions of 21 CFR part 20 and 21 CFR 514.11(e)(2)(ii), a summary of safety and effectiveness data and information submitted to support approval of this application may be seen in the Division of Dockets Management (HFA-305), Food and Drug Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852, between 9 a.m. and 4 p.m., Monday through Friday.
The agency has determined under 21 CFR 25.33(a)(1) that this action is of a type that does not individually or cumulatively have a significant effect on the human environment. Therefore, neither an environmental assessment nor an environmental impact statement is required.
This rule does not meet the definition of “rule” in 5 U.S.C. 804(3)(A) because it is a rule of “particular applicability.” Therefore, it is not subject to the congressional review requirements in 5 U.S.C. 801-808.
Animal drugs.
21 U.S.C. 360b.
(a)
(b)
(2) Each mL of solution contains 200 mg erythromycin base.
(c)
(d)
(i)
(ii)
(iii)
(2)
(i)
(ii)
(iii)
(3)
(i)
(ii)
(iii)
Department of Justice.
Final rule.
This rule makes one revision to the Department of Justice regulations on the destruction of contraband drug evidence. The rule concerns the proper handling and disposal of liquid phencyclidine (PCP).
Wendy H. Goggin, Chief Counsel, Drug Enforcement Administration, Washington, DC 20537, Telephone (202) 307-1000.
This final rule implements one change to Title 28, Code of Federal Regulations (CFR), Part 50 and addresses the proper handling and disposal of liquid PCP, which is problematic because it is a controlled substance and acutely hazardous by nature. Liquid PCP contains piperidine, a flammable liquid that can be fatal if inhaled or ingested; sodium/potassium cyanide, which is highly poisonous and corrosive; and solvents, such as benzene, toluene and ethyl ether, which are toxic, flammable and possibly carcinogenic. These hazardous materials pose significant hazards to life and property because of their explosive, flammable, poisonous, and toxic characteristics. These risks can partially be mitigated by reducing the amount of liquid PCP that the Drug Enforcement Administration (DEA) and the Federal Bureau of Investigation (FBI) are presently required to preserve.
A detailed explanation of this revision follows:
To address the proper handling and disposal of liquid PCP, this amendment implements a change to Title 28, CFR, Part 50, regarding the preservation of contraband drug evidence by DEA and the FBI, and will reduce the amount of liquid PCP the Government is required to preserve. Specifically, the amended regulation will reduce the amount of liquid PCP that Department of Justice (DOJ) law enforcement agencies (LEAs) are required to preserve from 200 grams of pure liquid PCP, or 2,000 grams of a liquid that contains a detectable amount of PCP, to 28.35 grams, or one (1) fluid ounce, of a liquid that contains PCP, in any form. Because the quantities currently required to be preserved jeopardize the safety of DOJ LEA personnel, reducing the preserved amount of liquid PCP to 28.35 grams will substantially reduce the risk to DOJ employees and facilities, and simultaneously ensure sufficient quantities for re-tests if the identity of a substance is disputed. Retention of a greater amount of PCP is unnecessary for due process in criminal cases.
The preservation amounts for powdered PCP are unchanged.
This rule relates to a matter of agency management or personnel and is a rule of agency organization, procedure, and practice. As such, this rule is exempt from the usual requirements of prior notice and comment and a 30-day delay in effective date.
The Attorney General, in accordance with the Regulatory Flexibility Act, 5 U.S.C. 605(b), has reviewed this rule and, by approving it, certifies that it will not have a significant economic impact on a substantial number of small entities because it pertains to personnel and administrative matters affecting the Department. Further, a Regulatory Flexibility Analysis was not required to be prepared for this final rule because the Department was not required to publish a general notice of proposed rulemaking for this matter.
This rule has been drafted and reviewed in accordance with Executive Order 12866, Regulatory Planning and Review, section 1(b), Principles of Regulation. This rule is limited to agency organization, management and personnel as described by Executive Order 12866 section 3(d)(3) and, therefore, is not a “regulation” or “rule” as defined by that Executive Order. Accordingly, this rule has not been reviewed by the Office of Management and Budget.
This regulation meets the applicable standards set forth in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform.
This rule will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, in accordance with Executive Order 13132, Federalism, the Department has determined that this rule does not have sufficient federalism implications to warrant the preparation of a federalism summary impact statement.
This rule will not result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year, and it will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1501
This rule is not a major rule as defined by section 251 of the Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 804. This rule will not result in an annual effect on the economy of $100 million or more; a major increase in costs or prices; or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based companies to compete with foreign-based companies in domestic and export markets.
This action pertains to agency management, personnel, and organization and does not substantially affect the rights or obligations of non-agency parties. Accordingly, it is not a “rule” for purposes of the reporting requirement of 5 U.S.C. 801.
The Department of Justice has determined that this action is a rule relating to agency organization, procedure or practice that does not substantially affect the rights or obligation of non-agency parties and, accordingly, it is not a “rule” as that term is used by the Congressional Review Act (Subtitle E of the Small Business Regulatory Enforcement Fairness Act of 1996). Therefore, the reporting requirement of 5 U.S.C. 801 does not apply.
Administrative practice and procedure.
5 U.S.C. 301; 28 U.S.C. 509, 510; 42 U.S.C. 1921
(d) * * *
(4) * * *
(iv) Two hundred grams of powdered phencyclidine (PCP) or two kilograms of a powdered mixture or substance containing a detectable amount of phencyclidine (PCP) or 28.35 grams of a liquid containing a detectable amount of phencyclidine (PCP);
Coast Guard, DHS.
Temporary rule.
The Coast Guard is temporarily changing the operating regulations governing the Jewfish Creek Bridge, Atlantic Intracoastal Waterway mile 1134, Key Largo, Monroe County, Florida. This rule will allow the Drawbridge to open on signal, except that from 7 a.m. until sunset this bridge will open on the hour and half-hour. This action is necessary for workers' safety.
This rule is effective 7 a.m. December 7, 2007 to April 30, 2008.
Documents indicated in this preamble as being available in the docket are part of the docket [Docket No. CGD07-07-252] and are available for inspection or copying at Commander (dpb), Seventh Coast Guard District, 909 S.E. 1st Avenue, Room 432, Miami, Florida 33131-3028 between 8 a.m. and 4:30 p.m., Monday through Friday, except Federal holidays.
Mr. Michael Lieberum, Seventh Coast Guard District, Bridge Administration Branch, telephone number 305-415-6744.
We did not publish a notice of proposed rulemaking (NRPM) for this regulation. Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing an NPRM. An NPRM would be impracticable and contrary to the public interest as a delay in the effective date poses a risk to the construction workers and increases the risk of traffic accidents.
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective in less than 30 days after publication in the
The existing regulation of the draw requires that the Jewfish Creek Bridge, mile 1134 at Key Largo, shall open on signal; except that, from 10 a.m. to Sunset, Thursday through Sunday and Federal holidays, the draw need open only on the hour and half hour.
The owner of the bridge notified the Coast Guard that there is a noticeable difference in the vehicular delays and safety because of the vehicles backed up due to the on-demand openings. This has created additional accidents within the work zone and increases the potential of serious injuries to construction workers in the work zone. For these reasons the bridge owner has requested that the Coast Guard change the current operation of the Jewfish Creek Bridge. The drawbridge will be required to open twice an hour from 7 a.m. to sunset.
In cases of emergency, the drawbridge will be opened as soon as possible. This regulation is necessary for workers' safety.
This rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under section 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order.
Although bridge openings will be restricted, vessel traffic will still be able to transit the Atlantic Intracoastal Waterway pursuant to the revised opening schedule.
Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we have considered whether this rule would have a significant economic impact on a substantial number of small entities. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000.
The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities. This rule would affect the following entities, some of which may be small entities: The owners or operators of vessels needing to transit the Atlantic Intracoastal Waterway in the vicinity of the Jewfish Creek Bridge, persons intending to drive over the bridge, and nearby business owners. The revision to the openings schedule would not have a significant impact on a substantial number of small entities, although bridge openings will be restricted, vessel traffic will still be able to transit the Atlantic Intracoastal Waterway pursuant to the revised opening schedule.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding the rule so that they could better evaluate its effects on them and participate in the rulemaking process.
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business
This rule calls for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. We have analyzed this rule under that Order and have determined that it does not have implications for federalism.
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.
This rule will not affect a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights.
This rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden.
We have analyzed this rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.
This rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.
We have analyzed this rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. We have determined that it is not a “significant energy action” under that order because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211.
The National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note) directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through the Office of Management and Budget, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies.
This rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.
We have analyzed this rule under Commandant Instruction M16475.lD which guides the Coast Guard in complying with the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and have concluded that there are no factors in this case that would limit the use of a categorical exclusion under section 2.B.2 of the Instruction. Therefore, this rule is categorically excluded, under figure 2-1, paragraph (32)(e), of the Instruction, from further environmental documentation.
Bridges.
33 U.S.C. 499; 33 CFR 1.05-1(g); Department of Homeland Security Delegation No. 0170.1
(uu) Jewfish Creek Bridge, mile 1134, Key Largo. The draw shall open on signal, except that from 7 a.m. to sunset, the bridge shall open on the hour and half-hour.
Office of the Chief Financial Officer, Department of Education.
Final regulations.
The Secretary amends the Department's regulations governing the determination and recovery of indirect costs by grantees. These amendments address procedural aspects related to the establishment of temporary indirect cost rates, specify the temporary rate that will apply to grants generally, and clarify how indirect costs are determined for a group of applicants that apply for a single training grant.
These regulations are effective January 7, 2008.
Richard Mueller, U.S. Department of Education, 830 First Street, NE., room
If you use a telecommunications device for the deaf (TDD), you may call the Federal Relay Service (FRS) at 1-800-877-8339.
Individuals with disabilities may obtain this document in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) on request to the contact person listed under
On May 24, 2007, the Secretary published a notice of proposed rulemaking (NPRM) for these amendments in the
• Amending § 75.560(c) and (d) to specify the procedures used to establish a temporary indirect cost rate for any grantee that does not have a federally recognized indirect cost rate.
• Amending § 75.562(c) to clarify that a grantee cannot include the amount of a sub-award
• Amending § 75.564(e) to clarify the determination of indirect costs for a training grant in the context of a grant to a group of organizations that apply together for a grant under the procedures in §§ 75.127 through 75.129.
These final regulations provide a temporary indirect cost rate to a grantee that does not have a federally recognized indirect cost rate on the date the Department awards its first grant. The temporary rate for such a grantee will be 10 percent of the direct salaries and wages of the project. These regulations permit the use of a temporary indirect cost rate under the grant award for the first 90 days after the date the Department issues the Grant Award Notification. A grantee may continue to charge indirect costs at the temporary rate after the first 90 days if the grantee submits a formal indirect cost proposal to its cognizant agency within those 90 days. If, after the 90-day period, a grantee has not submitted an indirect cost proposal to its cognizant agency, it must stop using the temporary rate. After that period, the grantee will not be allowed to charge any indirect costs to its grant until it obtains a federally recognized indirect cost rate from its cognizant agency.
These regulations make the Department's practice consistent with the practice of other Federal agencies and reduce the number of improper payments that result when applicants budget indirect costs that are greater than the actual indirect costs the applicant can expect to recover under Federal cost principles. As explained in the NPRM, under the Department's prior practice, new grantees of the Department were not recovering any indirect costs until they negotiated an indirect cost rate with their cognizant agencies. These regulations now enable a new grantee to recover indirect costs at the temporary rate until it negotiates a rate with its cognizant agency or for 90 days if it does not submit its indirect cost rate proposal to its cognizant agency within the 90-day period.
The regulations also clarify how the modified total direct cost base is determined when a grant is subject to the eight percent indirect cost rate limitation for training grants and specify how to treat sub-awards (contracts) if the indirect cost rate is applied to a grant made to a group under the procedures in §§ 75.127 through 75.129.
In the NPRM we invited comments on the proposed regulations. We did not receive any comments. There are no substantive differences between the NPRM and these final regulations. However, we have reviewed the regulations since publication of the NPRM and have made the following technical changes:
• We revised § 75.560(d)(3)(i) by deleting the words “after the date the indirect cost proposal was submitted to the cognizant agency” because this description of the period during which a grantee may recover costs at the negotiated rate is stated in paragraph (d)(3). The revised paragraph (d)(3)(i) simply states that the total amount of funds recovered by the grantee under the federally recognized indirect cost rate is reduced by the amount of indirect costs “previously recovered under the temporary indirect cost rate.” We believe these changes make the paragraph easier to understand.
• We added a note following § 75.562(c)(1) to clarify that, for any grantee that did not have a federally recognized indirect cost rate on the date its training grant was awarded, the indirect costs recovered under the training grant limitation in § 75.562(c)(1) are also subject to the limitations in § 75.560(d)(3).
Also, as a result of our internal review, we have concluded that changes similar to those reflected in these final regulations also should be made to 34 CFR part 76, which applies to State-administered programs of the Department. Therefore, soon we intend to propose changes to part 76 that are consistent with the changes in these regulations.
Because the regulations authorizing a specified temporary indirect cost rate confer a benefit on new grantees, the Secretary has discretion to apply the regulations to grants made before the effective date of these regulations. Under the final regulations, a grantee must submit a formal indirect cost proposal to its cognizant agency within 90 days after the date the Department issues the Grant Award Notification (GAN). However, we are aware that some new grantees are currently in the first budget period of their grants and do not have Federally recognized indirect cost rates. These grantees would benefit from being able to use the temporary indirect cost rate as soon as these regulations become effective in 30 days. Accordingly, any grantee that was or is issued a GAN before these regulations become effective on January 7, 2008, is in the first budget period of its grant, and did not have a federally recognized indirect cost rate on the date the GAN was issued, may begin using the temporary indirect cost rate starting on the effective date of these regulations and will have until April 7, 2008 (90 days after the effective date of these final regulations) to submit a formal indirect cost proposal to its cognizant agency. If a grantee submits an indirect cost proposal within the 90 days after the regulations become effective, it may continue charging at the temporary rate until it obtains a federally recognized indirect cost rate. The Secretary takes this action so that new grantees may benefit from these amendments as soon as possible.
Finally, § 75.562(c)(2) requires grantees to exclude all contract costs in excess of $25,000 from the base used to calculate the total indirect cost recovery under a training grant. This exclusion will apply to the first training grant (new or continuation) made to a grantee after the date these regulations become effective.
We have reviewed these final regulations in accordance with
The potential costs associated with the final regulations are those resulting from statutory requirements and those we have determined to be necessary for administering the Department's Direct Grant programs effectively and efficiently.
In assessing the potential costs and benefits—both quantitative and qualitative—of this regulatory action, we have determined that the benefits would justify the costs.
These regulations impose no additional burdens on applicants for discretionary grants or recipients of those grants. The regulations merely specify the rate at which grantees can recover indirect costs during a temporary period when the grantee does not have an indirect cost rate recognized by the Federal Government and establish procedural requirements regarding temporary indirect cost rates. While these final regulations prohibit a grantee from recovering indirect costs if the grantee has not submitted its indirect cost proposal within the 90 days after the date the Department issues the GAN, the burden and timing of submitting an indirect cost rate proposal under the procedures in the Federal cost principles do not change at all.
These regulations do not contain any information collection requirements.
These regulations affect Direct Grant programs of the Department that are subject to Executive Order 12372 and the regulations in 34 CFR part 79. One of the objectives of the Executive order is to foster an intergovernmental partnership and to strengthen federalism. The Executive order relies on processes developed by State and local governments for coordination and review of proposed Federal financial assistance.
This document provides early notification of our specific plans and actions for these programs.
In the NPRM we requested comments on whether the proposed regulations would require transmission of information that any other agency or authority of the United States gathers or makes available.
Based on the response to the NPRM and on our review, we have determined that these final regulations do not require transmission of information that any other agency or authority of the United States gathers or makes available.
You may view this document, as well as all other Department of Education documents published in the
To use PDF you must have Adobe Acrobat Reader, which is available free at this site. If you have questions about using PDF, call the U.S. Government Printing Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC, area at (202) 512-1530.
The official version of this document is the document published in the
Administrative practice and procedure, Education Department, Grant programs—education, Grant administration, Performance reports, Reporting and recordkeeping requirements, Unobligated funds.
20 U.S.C. 1221e-3 and 3474, unless otherwise noted.
(b) A grantee must have obtained a current indirect cost rate agreement from its cognizant agency, to charge indirect costs to a grant. To obtain an indirect cost rate, a grantee must submit an indirect cost proposal to its cognizant agency within 90 days after the date the Department issues the Grant Award Notification (GAN).
(c) If a grantee does not have a federally recognized indirect cost rate agreement, the Secretary may permit the grantee to charge its grant for indirect costs at a temporary rate of 10 percent of budgeted direct salaries and wages.
(d)(1) If a grantee fails to submit an indirect cost rate proposal to its cognizant agency within the required 90 days, the grantee may not charge indirect costs to its grant from the end of the 90-day period until it obtains a federally recognized indirect cost rate agreement applicable to the grant.
(2) If the Secretary determines that exceptional circumstances warrant continuation of a temporary indirect cost rate, the Secretary may authorize the grantee to continue charging indirect costs to its grant at the temporary rate specified in paragraph (c) of this section even though the grantee has not submitted its indirect cost rate proposal within the 90-day period.
(3) Once a grantee obtains a federally recognized indirect cost rate that is applicable to the affected grant, the grantee may use that indirect cost rate to claim indirect cost reimbursement for expenditures made on or after the date the grantee submitted its indirect cost proposal to its cognizant agency or the start of the project period, whichever is later. However, this authority is subject to the following limitations:
(i) The total amount of funds recovered by the grantee under the federally recognized indirect cost rate is reduced by the amount of indirect costs previously recovered under the temporary indirect cost rate.
(ii) The grantee must obtain prior approval from the Secretary to shift direct costs to indirect costs in order to recover indirect costs at a higher negotiated indirect cost rate.
(iii) The grantee may not request additional funds to recover indirect costs that it cannot recover by shifting direct costs to indirect costs.
(c)(1) Indirect cost reimbursement on a training grant is limited to the recipient's actual indirect costs, as determined in its negotiated indirect cost rate agreement, or eight percent of a modified total direct cost base, whichever amount is less.
If the grantee did not have a federally recognized indirect cost rate agreement on the date the training grant was awarded, indirect cost recovery is also limited to the amount authorized under § 75.560(d)(3).
(2) For the purposes of this section, a modified total direct cost base consists of total direct costs minus the following:
(i) The amount of each sub-award in excess of $25,000.
(ii) Stipends.
(iii) Tuition and related fees.
(iv) Equipment, as defined in 34 CFR 74.2 and 80.3, as applicable.
If the grantee has established a threshold for equipment that is lower than $5,000 for other purposes, it must use that threshold to exclude equipment under the modified total direct cost base for the purposes of this section.
(3) The eight percent indirect cost reimbursement limit specified in paragraph (c)(1) of this section also applies to sub-awards that fund training, as determined by the Secretary under paragraph (b) of this section.
(4) The eight percent limit does not apply to agencies of State or local governments, including federally recognized Indian tribal governments, as defined in 34 CFR 80.3.
(5) Indirect costs in excess of the eight percent limit may not be charged directly, used to satisfy matching or cost-sharing requirements, or charged to another Federal award.
(e)(1) Indirect costs for a group of eligible parties (See §§ 75.127 through 75.129) are limited to the amount derived by applying the rate of the applicant, or a restricted rate when applicable, to the direct cost base for the grant in keeping with the terms of the applicant's federally recognized indirect cost rate agreement.
(2) If a group of eligible parties applies for a training grant under the group application procedures in §§ 75.127 through 75.129, the grant funds allocated among the members of the group are not considered sub-awards for the purposes of applying the indirect cost rate in § 75.562(c).
Environmental Protection Agency (EPA).
Direct final rule.
EPA is approving revisions to the Georgia State Implementation Plan (SIP), submitted by the Georgia Department of Natural Resources (GA DNR), through the Georgia Environmental Protection Division (GA EPD), on September 26, 2007. The revisions include modifications to Georgia's Air Quality Rules found at Chapter 391-3-20-.21, pertaining to rules for Enhanced Inspection and Maintenance (I/M). Enhanced I/M was required for 1-hour nonattainment areas classified as serious and above, under the Clean Air Act (CAA) as amended in 1990. The I/M program is a way to ensure that vehicles are maintained properly and verify that the emission control system is operating correctly, in order to reduce vehicle-related emissions. This action is being taken pursuant to section 110 of the CAA.
This direct final rule is effective February 5, 2008 without further notice, unless EPA receives adverse comment by January 7, 2008. If adverse comment is received, EPA will publish a timely withdrawal of the direct final rule in the
Submit your comments, identified by Docket ID Number, “EPA-R04-OAR-2007-1059,” by one of the following methods:
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Stacy Harder, Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303-8960. The telephone number is (404) 562-9042. Ms. Harder can also be reached via electronic mail at
EPA is approving a SIP revision submitted by the GA DNR, through GA EPD on September 26, 2007, pertaining to rules for I/M. The revisions include changes to Georgia's Air Quality Rules, found at Chapters 391-3-20-.21, subparagraphs (3)(a) through (d). These revisions became State effective on September 26, 2007.
Rule 391-3-20-.21 “Inspection Fees,” is being revised, effective October 1, 2007, to reduce the administrative fee paid by the station owner to the GA DNR from $6.95 to $4.02 per pre-purchased Certificate of Emission Inspection. The fee for fleet inspection stations where GA EPD has required the installation and operation of a video camera surveillance system, is being reduced from $7.95 to $5.02. The reductions are based, in part, on lower contractual expenses effective October 1, 2007. This change will have a positive impact on small business owners that conduct vehicle inspections, by reducing their costs. There is no change in cost to the general public, as the inspection fee will remain the same. Additionally, this change has no effect on the emissions reductions claimed in the SIP.
EPA is taking direct final action to approve the aforementioned revisions, specifically, Chapters 391-3-20-.21 subparagraphs (3)(a) through (d) into the Georgia SIP. These revisions were submitted by GA EPD on September 26, 2007.
EPA is publishing this rule without prior proposal because the Agency views this as a noncontroversial submittal and anticipates no adverse comments. However, in the proposed rules section of this
If EPA receives such comments, EPA will then publish a document withdrawing the direct final rule and informing the public that such rule will not take effect. All public comments received will then be addressed in a subsequent final rule based on the proposed rule. EPA will not institute a second comment period. Parties interested in commenting should do so at this time. If no such comments are received, the public is advised that this rule will be effective on February 5, 2008 and no further action will be taken on the proposed rule.
Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This action merely approves state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). Because this rule approves pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4).
This rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999). This action merely approves a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the CAA. This rule also is not subject to Executive Order 13045, “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997), because it is not economically significant.
In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the CAA. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the CAA. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. This rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
The Congressional Review Act, U.S.C. 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the
Under section 307(b)(1) of the CAA, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by
Environmental protection, Air pollution control, Carbon monoxide, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
42 U.S.C. 7401 et seq.
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Environmental Protection Agency (EPA).
Final rule.
This final rule makes revisions to the pesticide tolerance crop grouping regulations. Crop grouping allows tolerances to be established for multiple related crops based on data from a representative set of crops. The revisions will create a new crop group for edible fungi (mushrooms), expand existing crop groups by adding new commodities, establish new crop subgroups, and revise the representative crops in some groups. Additionally, EPA is revising the general crop group regulation to explain how the Agency will implement revisions to crop groups. EPA expects these revisions to promote greater use of crop groupings for tolerance-setting purposes and, in particular, assist in retaining or making pesticides available for minor crop uses. This is the first in a series of planned crop group updates expected during the next several years.
This final rule is effective on December 7, 2007.
EPA has established a docket for this action under docket identification (ID) number EPA-HQ-OPP-2007-0766. To access the electronic docket, go to
Rame Cromwell, Office of Pesticide Programs, Environmental Protection Agency, 1200 Pennsylvania Ave., NW., Washington, DC 20460-0001; telephone number: 703-308-9068; fax number: 703-305-5884; e-mail address:
You may be potentially affected by this action if you are an agricultural producer or food manufacturer. Potentially affected entities may include, but are not limited to:
• Crop Production (NAICS code 111).
• Animal Production (NAICS code 112).
• Food Manufacturing and Processing (NAICS code 311).
• Pesticide manufacturing (NAICS code 32532).
This listing is not intended to be exhaustive, but rather provides a guide for readers regarding entities likely to be affected by this action. Other types of entities not listed in this unit could also be affected. The North American Industrial Classification System (NAICS) codes have been provided to assist you and others in determining whether this action might apply to certain entities. If you have any questions regarding the applicability of this action to a particular entity, consult the person listed under
This final rule, under the provisions of section 408 of the Federal Food, Drug, and Cosmetic Act (FFDCA), amends
The crop grouping concept leads to an estimate of the maximum residue level (MRL) that could occur on any crop within the group. The minimum data required for a group tolerance consists of residue data for all representative commodities for a group. This action is intended to promote more extensive use of crop group tolerances and, in particular, will assist in retaining or making pesticides available for minor crop uses.
This final rule is the first in a series of planned crop group updates expected to be promulgated in the next several years.
EPA is authorized to establish tolerances for pesticide chemical residues in food under FFDCA section 408. EPA establishes tolerances for each pesticide based on the potential risks to human health posed by that pesticide. A tolerance is the maximum permissible residue level established for a pesticide in raw agricultural produce and processed foods. The crop group regulations currently in 40 CFR 180.40 and 180.41 enable the establishment of tolerances for a group of crops based on residue data for certain crops that are representative of the group. Crop group regulations are promulgated under section 408(e)(1)(C) which authorizes EPA to establish “general procedures and requirements to implement [section 408].” 21 U.S.C. 346 a(e)(1)(C).
EPA published a notice of proposed rulemaking in the
In response to comments, EPA is modifying some aspects of the rule relating to commodities identification, but is adopting most provisions without change. For the reasons discussed in Unit V, EPA is making the following modifications in the final rule: (1) Add the general statement “will include cultivars, varieties, and/or hybrids of these” to replace the extensive list of hybrids to the crop groups. (2) Add Kiwi, fuzzy (
Otherwise, EPA is promulgating the rule as proposed.
Additionally, EPA is making one technical correction to the crop group regulation. The crop group regulation currently titles crop subgroups by giving them a number corresponding to the crop group number and also a letter to distinguish between subgroups. The number and letter are separated by a hyphen. For example, within the crop group for root and tuber vegetables (Crop Group 1), the root vegetables subgroup is designated as “Crop Subgroup 1-A.” Recent amendments to existing tolerances specified the number and letter of a subgroup without including a hyphen. Thus subgroup 1-A has been listed in the amended tolerances as 1A. To avoid correcting the recent amendments to hundreds if not thousands of tolerances, EPA is changing the crop group regulation to delete the hyphen in the designation of the crop subgroups number and letter. Thus, for example, in § 180.41(c)(1)(iii), “subgroup 1-A” will become “subgroup 1A.” Subgroups for amended crop groups will also drop the hyphen before the letter distinguishing the subgroup. Thus the bulb onion subgroup will be encoded as “subgroup 3-07A” not “subgroup 3-07-A.” EPA finds that there is good cause to make this change to the crop group regulation without prior notice and comment because this is a formatting change having no substantive or procedural effect, and thus notice and comment is unnecessary.
In this section EPA describes the comments received on the proposed rule, and EPA's response to those comments, including EPA's determination of necessary modification of the proposed rule for this final rule.
EPA is adopting provisions of the proposed rule without changes.
The final rule specifies that, when a crop group is amended in a manner that expands or contracts its coverage of commodities, EPA will (1) retain the pre-existing crop group in 40 CFR 180.41; (2) insert the revised crop group immediately after the pre-existing group in the Code of Federal Regulations (CFR); and (3) title the revised crop group in a way that clearly differentiates it from the pre-existing crop group. The revised crop group will retain roughly the same name and number as the pre-existing group except that the number will be followed by a hyphen and the final 2 digits of the year it is established.
Over time, EPA expects that tolerances for pre-existing crop groups would be upgraded and would eventually be converted to tolerances for the more recent crop groups. (See Unit VI.) The adoption of a standardized format for titling amended crop groups is specifically designed to create a clear distinction between pre-existing and amended crop groups. These procedures are necessary because when EPA expands an existing crop group it is difficult to simultaneously amend the dozens of pesticide tolerances for that crop group already in force.
One commenter objected to this new scheme claiming it may result in confusion for growers and difficulties in harmonizing U.S. tolerances with international maximum residue levels for pesticides. The commenter suggested that if the change in the crop group is significant, a distinctive new name should be given the new crop group, but if the change involves adding only minor crops and no alteration of the representative commodities then “no change in tolerance expression should be necessary when requesting label amendments adding the new minor crops.”
EPA understands that modifying existing crop groups could lead to confusion. For this reason it is adopting transparent procedures for how such modification will be published in the CFR and the titling procedure that will be used. Along these lines, an outreach effort to inform registrants, agriculture professionals, trade partners and others will be undertaken in support of these changes. EPA agrees with the commenter that if a crop group is changed in significant ways, a new descriptive name is appropriate. EPA has done just that with the berries crop group, changing the name to the berry and small fruit group to reflect the significant crops added to the group.
However, EPA disagrees with the assertion that no new crop group (and crop group name) is needed when only minor crops are added and the representative commodities remain the same. Unless EPA creates a new crop group when it expands the coverage of an existing group by adding new commodities, EPA will be expanding the scope of all then-current existing
EPA is adopting its proposal with one change, not to list specific hybrids. The final rule retains the pre-existing Crop Group 3 and titles the revised group as Crop Group 3-07.
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A commenter recommended that specific hybrids in the Bulb Vegetable Crop Group should not be listed. The commenter claimed that listing some hybrids and/or cultivars can cause confusion and uncertainty for growers of hybrids that are not listed.
EPA agrees with the commenter that extensive listings of hybrids are not necessary and could be confusing. Instead, the Agency is replacing the extensive lists of hybrids and cultivars with a general statement that will include cultivars, varieties, and/or hybrids of these commodities.
EPA is adopting its proposal with an added commodity. The final rule revises and expands the berries crop group, but retains pre-existing Crop Group 13 and titles the revised group Crop Group 13-07.
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Several comments were received regarding the addition of kiwifruit to this crop group. One commenter requested that both “Kiwifruit, hardy” and “Kiwifruit, fuzzy” be removed from the crop group and a new group be created for inedible skinned tropical fruit. Another commenter asked that only “Kiwifruit, fuzzy” be deleted from the group. This commenter argued that fuzzy kiwifruit are different in size and in plant growth habits from other fruits in the group as well as being the only fruit in the group with inedible skin. The commenter further noted that any future inclusion of fuzzy kiwifruit in a crop group should recognize that there are currently two cultivars presently being grown commercially (
EPA believes that it is appropriate to keep both hardy and fuzzy kiwifruit as members of the berry and small fruit crop group. Kiwifruit is considered a trellis crop similar to grape culture, and its peel, while traditionally deemed inedible, is becoming increasingly popular to eat. Nonetheless, EPA will also consider adding the fuzzy kiwifruit to a tropical fruit crop group under development. Additionally, EPA agrees with the recommendation to amend the definition of fuzzy kiwifruit to include both its green (
One comment was received concerning adding Low growing berry subgroups to the berry and small fruit group. The commenter asserted that these subgroups contain diverse berries which vary significantly in harvest practices (e.g. strawberry vs. blueberry) as well as growth habit (e.g., blueberry vs. cranberry). The commenter stated that, although the approach of creating inclusive new crop groups is desirable, in these instances it may be unlikely that pest control solutions are likely to have similar directions for use (number of applications, pre-harvest interval, use rate, etc.), thus making the probability of having the same tolerance quite low. The commenter speculated that the likelihood of use of these subgroups may be low.
EPA disagrees that the commodities in these subgroups are too diverse. This subgroup was formed based on the commodities being either short shrubs or herbaceous perennials less than two feet in height. Most of these berries are from botanical families of
EPA received no comments on the addition of this new group and adopts its proposed rule without change.
No comments were submitted on the proposed technical corrections section, and EPA adopts its proposed rule without change.
A commenter suggested significant changes to the preamble regarding the background of the rule.
These comments did not pertain to the substance of the rule. EPA will consider these comments in the development of preambles for future proposed rules on crop groups.
The Agency received a comment asking how the proposed changes will affect established product labels, including use directions for crops that are moved into new crop grouping arrangements.
There will be no EPA required changes to existing product labels. For product labels, crops are not automatically listed with the new crop group members. In addition, with respect to pre-existing tolerances, the existing crop groups will remain in place until a petition request is made to revise them or a chemical goes through the registration review process. At that time, and at the discretion of the registrant, labels would also have to be amended to reflect the changes to add the new crop group.
Another commenter asked how the proposed changes would affect residue programs of registrants and IR-4 that are now in progress and may have been initiated under soon-to-be-superseded crop groupings. The commenter asked whether such field residue programs can be completed under the existing crop groupings, and if adapting the programs to the new crop groups would delay submission of tolerance petitions.
The changes in the final rule will not impact on-going residue programs nor should it delay submissions of tolerance petitions. The changes being made do not require different field trial data for the representative commodities. In the case of Crop Group 3-07: Bulb Vegetable Group, the two representative commodities are still bulb onion and green onion. The rule will add subgroups and include additional crops. The field residue data requirements remain the same. Therefore, the only changes required for submission of the tolerance petitions will be administrative in that a new petition should reflect the new crop groups or subgroups. As stated in the proposed rule, once this rule is final, EPA will not establish new tolerances under the pre-existing groups.
The Agency received a comment on whether an administrative process could replace tolerance petitions to speed up and smooth the revision of existing tolerances affected by changes in crop groupings, especially since most of the additions of orphan/minor crops will not impact dietary risk assessment. The commenter suggested that there is a potential for unfair marketing advantage for new active ingredients versus currently registered active ingredients, if a tolerance petition is always required. It was proposed that IR-4 might play a facilitating role in administrative updates for all active ingredients affected by a particular crop grouping change.
In response, EPA would note that section 408 sets forth specific rule-making procedures for establishing and modifying tolerances. The process for taking advantage of the new group of edible fungi or expanded and updated groups of bulb vegetables and berries involves making a tolerance petition to EPA. The administrative and governing statutory requirements are analogous, whether the petition involves a single crop or one of the new or updated crop groups.
EPA received a comment that the conversion of existing crop group tolerances to the new crop group definitions could require petition action by a registrant and amendments to labels under the plan proposed by EPA (see Unit III. A. of the preamble of the proposed rule). The commenter stated that when a tolerance petition for one crop or group includes a request to amend a different tolerance solely to conform to a new crop group definition, the registration service fee under FIFRA section 33 should not be imposed or increased for that amendment action if it does not involve review of any data, or for subsequent conforming label amendments.
The fees for making label changes listed under PRIA are clearly defined. However, for this sort of change the registrant may request a discretionary refund for data that have already been reviewed. EPA will evaluate these requests as they are submitted, but it will not, at this time, make an across-the-board determination on PRIA fees. Further, registrants may choose not to make these changes when submitting a petition request for other crops. Because of the demonstrated advantages of the updated or new crop groups, EPA will eventually propose to convert existing crop groups on its own through mechanisms such as the registration review process.
Finally, EPA received a comment asking which crops from groups covered by crop group tolerances should be listed on the label in order to cover use of the pesticide on the entire group of all crops, selected crops, and representative crops only. EPA agrees that there are some coordination issues relative to labeling and tolerance expression and will address this question in other ways and through outreach activities.
After the effective date, when a crop group is amended in a manner that expands or contracts its coverage of commodities, EPA will (1) retain the pre-existing crop group in § 180.41; (2) insert the revised crop group immediately after the pre-existing crop group in the CFR; (3) title the revised crop group in a way that clearly differentiates it from the pre-existing crop group.
The revised crop group will retain roughly the same name and number as the pre-existing group except the number will be followed by a hyphen and the final digits of the year established. (e.g., Crop Group 3-07)
EPA will initially retain pre-existing crop groups that have been superseded by revised crop groups. EPA will not establish new tolerances under the pre-existing groups. Further, EPA plans to eventually convert tolerances for any pre-existing crop group to tolerances with coverage of the revised crop group.
For existing petitions for which a Notice of Filing has been published, the Agency will attempt to conform these petitions to this rule.
Under Executive Order 12866, entitled
EPA prepared an analysis of the potential costs and benefits associated with this action. This analysis is contained in “Economic Analysis Final Expansion of Crop Grouping Program.” A copy of the analysis is available in the docket and is briefly summarized here.
This is a burden-reducing regulation. Crop grouping has saved money by permitting the results of pesticide exposure studies for one crop to be applied to other, similar crops. The regulation exploits this opportunity for saving money by expanding certain crop groups and creating a new crop group for edible fungi.
The primary beneficiaries of the regulation are minor crop producers and consumers. Specialty crop producers will benefit because lower regulatory costs will encourage more products to be registered on minor crops, providing additional tools for pest control. Consumers will benefit by having a larger supply of imported and domestically produced specialty produce at potentially lower costs. Secondary beneficiaries are pesticide registrants, who benefit because expanded markets for pesticide products will lead to increased sales. The IR-4 Project and EPA, which are publicly funded Federal government entities, will also more efficiently use resources as a result of the rule. EPA will also benefit from broader operational efficiency gains, which result from fewer emergency pesticide use requests from specialty crop growers, the ability to conduct risk assessments based on crop grouping, greater ease of establishing import tolerances, greater capacity to assess risks of pesticides used on crops not grown in the US, further harmonization of crop classification and nomenclature, harmonized commodity import and export standards, and increased potential for resource sharing between EPA and other pesticide regulatory agencies. Revisions to the crop grouping program will result in no appreciable costs or negative impacts to consumers, specialty crop producers, pesticide registrants, the environment or human health.
No comments were received on the costs or burdens described in the Economic Analysis for the proposed rule.
This rule does not contain any new information collection requirements that would need approval by OMB under the provisions of the Paper Reduction Act (PRA), 44 U.S.C. 3501
Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601
For purposes of assessing the impacts of today's rule on small entities, small entity is defined as: (1) a small business according to the small business size standards established by the Small Business Administration (SBA); (2) a small governmental jurisdiction that is a government of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.
In determining whether a rule has a significant economic impact on a substantial number of small entities, the impact of concern is any significant adverse economic impact on small entities, since the primary purpose of the regulatory flexibility analyses is to identify and address regulatory alternatives ‘‘which minimize any significant economic impact of the final rule on small entities'' (5 U.S.C. sections 603 and 604). Thus, an agency may certify that a rule will not have a significant economic impact on a substantial number of small entities if the rule relieves regulatory burden, or otherwise has positive economic effects on all of the small entities subject to the rule.
This rule provides regulatory relief and regulatory flexibility because the new or expanded crop groups ease the process for pesticide manufacturers to obtain pesticide tolerances on greater numbers of crops and make it likely that pesticides will be more widely available to growers for use on crops, particularly specialty crops.
Under Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Public Law 104-4), EPA has determined that this action does not contain a Federal mandate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in any 1 year. Accordingly, this rule is not subject to the requirements of sections 202, 203, 204, and 205 of UMRA.
Pursuant to Executive Order 13132, entitled
As required by Executive Order 13175, entitled
Executive Order 13045, entitled
This rule is not subject to Executive Order 13211, entitled
Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (NTTAA), (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or impractical. Voluntary consensus standards are technical standards (e.g., materials specifications, test methods, and sampling procedures) that are developed or adopted by voluntary consensus standards bodies. This rule does not impose any technical standards that would require EPA to consider any voluntary consensus standards.
Under Executive Order 12898, entitled
The Agency hereby certifies that this rule will not have significant negative economic impact on a substantial number of small entities.
The Congressional Review Act, 5 U.S.C. 801
Environmental protection, Administrative practice and procedures, pesticides and pests.
21 U.S.C. 321(q), 346a, and 371
(g) * * *
(j) When EPA amends a crop group in a manner that expands or contracts the commodities that are covered by the group, EPA will initially retain the pre-existing as well as the revised crop group in the CFR. The revised crop group will have the same number as the pre-existing crop group; however, the revised crop group number will be followed by a hyphen and the final two digits of the year in which it was established (e.g., if Crop Group 1 is amended in 2007, the revised group will be designated as Crop Group 1-07). If the pre-existing crop group had crop subgroups, these subgroups will be numbered in a similar fashion in the revised crop group. The name of the revised crop group will not be changed from the pre-existing crop group unless the revision so changes the composition of the crop group that the pre-existing name is no longer accurate. Once a revised crop group is established, EPA will no longer establish tolerances under the pre-existing crop group. At appropriate times, EPA will amend tolerances for crop groups that have
(c) * * *
(3)
(i)
(ii)
(4)
(ii)
(iii)
(c) * * *
(15)
(i)
(ii)
(iii)
(22)
(i)
(ii)
Defense Acquisition Regulations System, Department of Defense (DoD).
Final rule.
DoD is making a technical amendment to the Defense Federal Acquisition Regulation Supplement (DFARS) to update a cross-reference within the DFARS text.
Ms. Michele Peterson, Defense Acquisition Regulations System, OUSD (AT&L) DPAP (DARS), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone 703-602-0311; facsimile 703-602-7887.
This final rule amends DFARS 216.603-4 to update a cross-reference.
Government procurement.
41 U.S.C. 421 and 48 CFR Chapter 1.
Defense Acquisition Regulations System, Department of Defense (DoD).
Final rule.
DoD has issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to add a clause pertaining to patent rights under contracts awarded to large business concerns for experimental, developmental, or research work. The clause is substantially the same as a Federal Acquisition Regulation (FAR) clause that has been removed because DoD was the only agency using the clause.
Ms. Amy Williams, Defense Acquisition Regulations System, OUSD (AT&L) DPAP (DARS), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone 703-602-0328; facsimile 703-602-7887. Please cite DFARS Case 2001-D015.
This final rule adds a clause at DFARS 252.227-7038, Patent Rights-Ownership by the Contractor (Large Business). The DFARS clause is similar to the clause previously found at FAR 52.227-12, Patent Rights-Retention by the Contractor (Long Form). The FAR clause was removed by the final rule published at 72 FR 63045 on November 7, 2007, because DoD was the only agency using the clause. The new DFARS clause also contains changes for consistency with current statutory provisions and with other changes made to the FAR in the final rule published on November 7, 2007. The clause is prescribed for use in contracts awarded to large business concerns for experimental, developmental, or research work.
DoD published a proposed rule at 69 FR 58377 on September 30, 2004. DoD received no comments on the proposed rule. Therefore, DoD has adopted the proposed rule as a final rule, with a minor change resulting from the final FAR rule published on November 7, 2007, removal of the clause at DFARS 252.227-7034, Patents-Subcontracts. The clause at DFARS 252.227-7034 was used in contracts containing the clause at FAR 52.227-11, Patent Rights-Retention by the Contractor (Short Form), to require inclusion of the clause at FAR 52.227-12, Patent Rights-Retention by the Contractor (Long Form), in subcontracts for experimental, developmental, or research work to be performed by other than a small business firm or nonprofit organization. Since the clause at FAR 52.227-12 has been removed, and paragraph (k) of the clause at FAR 52.227-11, as revised at 72 FR 63045 on November 7, 2007, adequately addresses subcontract requirements, the clause at DFARS 252.227-7034 is no longer necessary and is removed.
This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.
DoD certifies that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601,
The Paperwork Reduction Act (44 U.S.C. Chapter 35) applies. The information collection requirements in this rule are presently approved under Office of Management and Budget Control Number 9000-0095, applicable to FAR Subpart 27.3. These hours will be transferred to OMB Control Number 0704-0369, applicable to DFARS Part 227.
Government procurement.
41 U.S.C. 421 and 48 CFR Chapter 1.
(1) Use the clause at 252.227-7039, Patents—Reporting of Subject Inventions, in solicitations and contracts containing the clause at FAR 52.227-11, Patent Rights—Ownership by the Contractor.
(2)(i) Use the clause at 252.227-7038, Patent Rights—Ownership by the Contractor (Large Business), instead of the clause at FAR 52.227-11, in solicitations and contracts for experimental, developmental, or research work if—
(A) The contractor is other than a small business concern or nonprofit organization; and
(B) No alternative patent rights clause is used in accordance with FAR 27.303(c) or (e).
(ii) Use the clause with its Alternate I if—
(A) The acquisition of patent rights for the benefit of a foreign government is required under a treaty or executive agreement;
(B) The agency head determines at the time of award that it would be in the national interest to acquire the right to sublicense foreign governments or international organizations pursuant to any existing or future treaty or agreement; or
(C) Other rights are necessary to effect a treaty or agreement, in which case Alternate I may be appropriately modified.
(iii) Use the clause with its Alternate II in long-term contracts if necessary to
As prescribed in 227.303(2), use the following clause:
(a)
(1) Any invention or discovery that is or may be patentable or otherwise protectable under Title 35 of the United States Code; or
(2) Any variety of plant that is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 2321,
(1) When used in relation to any invention other than a plant variety, means the conception or first actual reduction to practice of the invention; or
(2) When used in relation to a plant variety, means that the Contractor has at least tentatively determined that the variety has been reproduced with recognized characteristics.
(1) A university or other institution of higher education;
(2) An organization of the type described in the Internal Revenue Code at 26 U.S.C. 501(c)(3) and exempt from taxation under 26 U.S.C. 501(a); or
(3) Any nonprofit scientific or educational organization qualified under a State nonprofit organization statute.
(1)(i) To manufacture, in the case of a composition or product;
(ii) To practice, in the case of a process or method; or
(iii) To operate, in the case of a machine or system; and
(2) In each case, under such conditions as to establish that—
(i) The invention is being utilized; and
(ii) The benefits of the invention are, to the extent permitted by law or Government regulations, available to the public on reasonable terms.
(b)
(2)
(A) Extends to any domestic subsidiaries and affiliates within the corporate structure of which the Contractor is a part;
(B) Includes the right to grant sublicenses to the extent the Contractor was legally obligated to do so at the time of contract award; and
(C) Is transferable only with the approval of the agency, except when transferred to the successor of that part of the Contractor's business to which the invention pertains.
(ii) The agency—
(A) May revoke or modify the Contractor's domestic license to the extent necessary to achieve expeditious practical application of the subject invention pursuant to an application for an exclusive license submitted in accordance with 37 CFR Part 404 and agency licensing regulations;
(B) Will not revoke the license in that field of use or the geographical areas in which the Contractor has achieved practical application and continues to make the benefits of the invention reasonably accessible to the public; and
(C) May revoke or modify the license in any foreign country to the extent the Contractor, its licensees, or the domestic subsidiaries or affiliates have failed to achieve practical application in that foreign country.
(iii) Before revoking or modifying the license, the agency—
(A) Will furnish the Contractor a written notice of its intention to revoke or modify the license; and
(B) Will allow the Contractor 30 days (or such other time as the funding agency may authorize for good cause shown by the Contractor) after the notice to show cause why the license should not be revoked or modified.
(iv) The Contractor has the right to appeal, in accordance with 37 CFR part 404 and agency regulations, concerning the licensing of Government-owned inventions, any decision concerning the revocation or modification of the license.
(c)
(i) Disclose, in writing, each subject invention to the Contracting Officer within 2 months after the inventor discloses it in writing to Contractor personnel responsible for patent matters, or within 6 months after the Contractor first becomes aware that a subject invention has been made, whichever is earlier;
(ii) Include in the disclosure—
(A) The inventor(s) and the contract under which the invention was made;
(B) Sufficient technical detail to convey a clear understanding of the invention; and
(C) Any publication, on sale (i.e., sale or offer for sale), or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication; and
(iii) After submission of the disclosure, promptly notify the Contracting Officer of the acceptance of any manuscript describing the invention for publication and of any on sale or public use.
(2) The Contractor shall elect in writing whether or not to retain ownership of any subject invention by notifying the Contracting Officer at the time of disclosure or within 8 months of disclosure, as to those countries (including the United States) in which the Contractor will retain ownership. However, in any case where publication, on sale, or public use has initiated the 1-year statutory period during which valid patent protection can be obtained in the United States, the agency may shorten the period of election of title to a date that is no more than 60 days prior to the end of the statutory period.
(3) The Contractor shall—
(i) File either a provisional or a nonprovisional patent application on an elected subject invention within 1 year after election, provided that in all cases the application is filed prior to the end of any statutory period wherein valid patent protection can be obtained in the United States after a publication, on sale, or public use;
(ii) File a nonprovisional application within 10 months of the filing of any provisional application; and
(iii) File patent applications in additional countries or international patent offices within either 10 months of the first filed patent application (whether provisional or nonprovisional) or 6 months from the date the Commissioner of Patents grants permission to file foreign patent applications where such filing has been prohibited by a Secrecy Order.
(4) The Contractor may request extensions of time for disclosure, election, or filing under paragraphs (c)(1), (2), and (3) of this clause. The Contracting Officer will normally grant the extension unless there is reason to believe the extension would prejudice the Government's interests.
(d)
(i) If the Contractor elects not to retain title to a subject invention;
(ii) If the Contractor fails to disclose or elect the subject invention within the times specified in paragraph (c) of this clause and the agency requests title within 60 days after learning of the Contractor's failure to report or elect within the specified times;
(iii) In those countries in which the Contractor fails to file patent applications within the times specified in paragraph (c) of this clause, provided that, if the Contractor has filed a patent application in a country after the times specified in paragraph (c) of this clause, but prior to its receipt of the written request of the agency, the Contractor shall continue to retain ownership in that country; and
(iv) In any country in which the Contractor decides not to continue the prosecution of any application for, to pay the maintenance fees on, or defend in reexamination or opposition proceeding on, a patent on a subject invention.
(2)
(e)
(i) Establish or confirm the rights the Government has throughout the world in those subject inventions in which the Contractor elects to retain ownership; and
(ii) Assign title to the agency when requested under paragraph (d)(1) of this clause and enable the Government to obtain patent protection for that subject invention in any country.
(2) The Contractor shall—
(i) Require, by written agreement, its employees, other than clerical and nontechnical employees, to—
(A) Disclose each subject invention promptly in writing to personnel identified as responsible for the administration of patent matters, so that the Contractor can comply with the disclosure provisions in paragraph (c) of this clause; and
(B) Provide the disclosure in the Contractor's format, which should require, as a minimum, the information required by paragraph (c)(1) of this clause;
(ii) Instruct its employees, through employee agreements or other suitable educational programs, as to the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to U.S. or statutory foreign bars; and
(iii) Execute all papers necessary to file patent applications on subject inventions and to establish the Government's rights in the subject inventions.
(3) The Contractor shall notify the Contracting Officer of any decisions not to file a nonprovisional patent application, continue the prosecution of a patent application, pay maintenance fees, or defend in a reexamination or opposition proceeding on a patent, in any country, not less than 30 days before the expiration of the response or filing period required by the relevant patent office.
(4) The Contractor shall include, within the specification of any United States nonprovisional patent application and any patent issuing thereon covering a subject invention, the following statement: “This invention was made with Government support under (identify the contract) awarded by (identify the agency). The Government has certain rights in this invention.”
(5) The Contractor shall—
(i) Establish and maintain active and effective procedures to ensure that subject inventions are promptly identified and disclosed to Contractor personnel responsible for patent matters;
(ii) Include in these procedures the maintenance of—
(A) Laboratory notebooks or equivalent records and other records as are reasonably necessary to document the conception and/or the first actual reduction to practice of subject inventions; and
(B) Records that show that the procedures for identifying and disclosing the inventions are followed; and
(iii) Upon request, furnish the Contracting Officer a description of these procedures for evaluation and for determination as to their effectiveness.
(6) The Contractor shall, when licensing a subject invention, arrange to—
(i) Avoid royalty charges on acquisitions involving Government funds, including funds derived through the Government's Military Assistance Program or otherwise derived through the Government;
(ii) Refund any amounts received as royalty charges on the subject inventions in acquisitions for, or on behalf of, the Government; and
(iii) Provide for the refund in any instrument transferring rights in the invention to any party.
(7) The Contractor shall furnish to the Contracting Officer the following:
(i) Interim reports every 12 months (or any longer period as may be specified by the Contracting Officer) from the date of the contract, listing subject inventions during that period and stating that all subject inventions have been disclosed or that there are no subject inventions.
(ii) A final report, within 3 months after completion of the contracted work, listing all subject inventions or stating that there were no subject inventions, and listing all subcontracts at any tier containing a patent rights clause or stating that there were no subcontracts.
(8)(i) The Contractor shall promptly notify the Contracting Officer in writing upon the award of any subcontract at any tier containing a patent rights clause by identifying—
(A) The subcontractor;
(B) The applicable patent rights clause;
(C) The work to be performed under the subcontract; and
(D) The dates of award and estimated completion.
(ii) The Contractor shall furnish, upon request, a copy of the subcontract, and no more frequently than annually, a listing of the subcontracts that have been awarded.
(9) In the event of a refusal by a prospective subcontractor to accept one of the clauses specified in paragraph (l)(1) of this clause, the Contractor—
(i) Shall promptly submit a written notice to the Contracting Officer setting forth the subcontractor's reasons for the refusal and other pertinent information that may expedite disposition of the matter; and
(ii) Shall not proceed with that subcontract without the written authorization of the Contracting Officer.
(10) The Contractor shall provide to the Contracting Officer, upon request, the following information for any subject invention for which the Contractor has retained ownership:
(i) Filing date.
(ii) Serial number and title.
(iii) A copy of any patent application (including an English-language version if filed in a language other than English).
(iv) Patent number and issue date.
(11) The Contractor shall furnish to the Government, upon request, an irrevocable power to inspect and make copies of any patent application file.
(f)
(i) Submit upon request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts in obtaining utilization of the subject invention that are being made by the Contractor or its licensees or assignees;
(ii) Include in the reports information regarding the status of development, date of first commercial sale or use, gross royalties received by the Contractor, and other information as the agency may reasonably specify; and
(iii) Provide additional reports that the agency may request in connection with any march-in proceedings undertaken by the agency in accordance with paragraph (h) of this clause.
(2) To the extent permitted by law, the agency shall not disclose the information provided under paragraph (f)(1) of this clause to persons outside the Government without the Contractor's permission, if the data or information is considered by the Contractor or its licensee or assignee to be “privileged and confidential” (see 5 U.S.C. 552(b)(4)) and is so marked.
(g)
(1) Reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States; or
(2) Under the circumstances, domestic manufacture is not commercially feasible.
(h)
(i)
(j)
(i) Any inventions are subject inventions;
(ii) The Contractor has established procedures required by paragraph (e)(5) of this clause; and
(iii) The Contractor and its inventors have complied with the procedures.
(2) If the Contracting Officer learns of an unreported Contractor invention that the Contracting Officer believes may be a subject invention, the Contractor shall be required to disclose the invention to the agency for a determination of ownership rights.
(3) Any examination of records under this paragraph (j) shall be subject to appropriate conditions to protect the confidentiality of the information involved.
(k)
(i) Establish, maintain, and follow effective procedures for identifying and disclosing subject inventions pursuant to paragraph (e)(5) of this clause;
(ii) Disclose any subject invention pursuant to paragraph (c)(1) of this clause;
(iii) Deliver acceptable interim reports pursuant to paragraph (e)(7)(i) of this clause; or
(iv) Provide the information regarding subcontracts pursuant to paragraph (e)(8) of this clause.
(2) The reserve or balance shall be withheld until the Contracting Officer has determined that the Contractor has rectified whatever deficiencies exist and has delivered all reports, disclosures, and other information required by this clause.
(3) The Government will not make final payment under this contract before the Contractor delivers to the Contracting Officer—
(i) All disclosures of subject inventions required by paragraph (c)(1) of this clause;
(ii) An acceptable final report pursuant to paragraph (e)(7)(ii) of this clause; and
(iii) All past due confirmatory instruments.
(4) The Contracting Officer may decrease or increase the sums withheld up to the maximum authorized in paragraph (k)(1) of this clause. No amount shall be withheld under this paragraph while the amount specified by this paragraph is being withheld under other provisions of the contract. The withholding of any amount or the subsequent payment thereof shall not be construed as a waiver of any Government right.
(l)
(i) Shall include the substance of the Patent Rights-Ownership by the Contractor clause set forth at 52.227-11 of the Federal Acquisition Regulation (FAR), in all subcontracts for experimental, developmental, or research work to be performed by a small business concern or nonprofit organization; and
(ii) Shall include the substance of this clause, including this paragraph (l), in all other subcontracts for experimental, developmental, or research work, unless a different patent rights clause is required by FAR 27.303.
(2) For subcontracts at any tier—
(i) The patents rights clause included in the subcontract shall retain all references to the Government and shall provide to the subcontractor all the rights and obligations provided to the Contractor in the clause. The Contractor shall not, as consideration for awarding the subcontract, obtain rights in the subcontractor's subject inventions; and
(ii) The Government, the Contractor, and the subcontractor agree that the mutual obligations of the parties created by this clause constitute a contract between the subcontractor and the Government with respect to those matters covered by this clause. However, nothing in this paragraph is intended to confer any jurisdiction under the Contract Disputes Act in connection with proceedings under paragraph (h) of this clause.
(End of clause)
As prescribed in 227.303(2)(ii), add the following paragraph (b)(2)(v) to the basic clause:
(v) The license shall include the right of the Government to sublicense foreign governments, their nationals, and international organizations pursuant to the following treaties or international agreements: ________*.
As prescribed in 227.303(2)(iii), add the following paragraph (b)(2)(v) to the basic clause:
(v) The agency reserves the right to—
(A) Unilaterally amend this contract to identify specific treaties or international agreements entered into or to be entered into by the Government after the effective date of this contract; and
(B) Exercise those license or other rights that are necessary for the Government to meet its obligations to foreign governments, their nationals, and international organizations under any treaties or international agreement with respect to subject inventions made after the date of the amendment.
As prescribed in 227.303(1), use the following clause:
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Final rule.
NMFS issues this final rule to require all vessels fishing pursuant to the harvest guidelines, quotas, and other management measures governing the open access groundfish fishery, and all trawl vessels to provide declaration reports and to activate and use a vessel monitoring system (VMS) transceiver while fishing off the coasts of Washington, Oregon and California. NMFS has implemented a series of large-scale geographically-defined closed areas intended to: minimize the bycatch of overfished groundfish species, minimize the bycatch of protected salmon species, and protect Essential Fish Habitat (EFH) from harm through contact with fishing gear. This action is intended to improve the monitoring of compliance with those closed areas through regular VMS transmissions of vessel locations for those vessels subject to groundfish closed area restrictions.
Effective February 4, 2008.
Copies of the Environmental Assessment/Regulatory Impact Review/Initial Regulatory Flexibility Analysis (EA/RIR/IRFA), Finding of No Significant Impact (FONSI), Final Regulatory Flexibility Analysis (FRFA), and the Small Entity Compliance Guide are available from D. Robert Lohn, Administrator, Northwest Region, NMFS, 7600 Sand Point Way NE, Seattle, WA 98115-0070, phone: 206-526-6150.
Written comments regarding the burden-hour estimates or other aspects of the collection-of-information requirements contained in this final rule may be submitted to D. Robert Lohn, Administrator, Northwest Region, NMFS, 7600 Sand Point Way NE, Seattle, WA 98115-0070, and by e-mail to
Becky Renko (Northwest Region, NMFS), phone: 206-526-6110; fax: 206-526-6736 and; e-mail:
This final rule is accessible via the Internet at the Office of the
On August 8, 2007, NMFS published a proposed rule to implement a VMS program for the West Coast groundfish open access fisheries (72 FR 44469,) requesting public comments through September 7, 2007. During the comment period, NMFS received eight emails of comment, which are addressed later in the preamble to this final rule. See the preamble to the proposed rule for additional background information on the VMS program and the open access fishery.
A VMS transceiver is an electronic device that is installed on a vessel to monitor the vessel's position in relation to geographically defined areas. The Council has determined that implementation of VMS requirements is necessary to monitor and enforce the extensive system of depth- and habitat-based closed areas employed in West coast groundfish management. This final rule requires all open access vessels to have a type-approved VMS transceiver unit that is properly activated and used from the time a vessel leaves port on a trip in which: groundfish is taken and retained in the EEZ; groundfish is possessed while operating in the EEZ (including transiting); or groundfish taken in the EEZ is landed. In addition, this final rule requires any vessel fishing in the EEZ with non-groundfish trawl gear to have a type-approved VMS transceiver unit properly installed and activated prior to leaving port. Once the VMS unit is activated, it must remain on throughout the remainder of the fishing year, unless such vessel is granted an exemption to the requirements for continuous operation. This final rule supplements the VMS program implemented on January 1, 2004, for the limited entry groundfish fisheries (November 4, 2003; 68 FR 62374).
During the comment period for the proposed rule for this action, NMFS received eight comments by email, which are addressed here:
The commenters are correct that the current list of VMS units type-approved for use in the Pacific Coast groundfish fishery includes small VMS transceiver units that are only capable of one way communications. At this time, NMFS Office for Law Enforcement is considering revising the list of type-approved units to include only units capable of two-way communications. The reason for considering such a revision is that the VMS transceiver units are valuable tools that can also be used to transmit other necessary fisheries management data to and from the vessels. There are VMS transceiver units that are capable of two-way communications that are similar in size and cost to the one-way units that are currently type-approved for the Pacific coast groundfish fishery.
The open access fleet consists of smaller sized vessels, with most being under 40 feet (metric equiv),fishery management and enforcement may benefit from having smaller units capable of two-way communications. However, the extremely limited space, minimal electronic support for a system, and difficulty in protecting electronic equipment from the marine environment on a large portion of vessels in the open access fleet was considered in the initial type-approval of VMS transceiver units for the Pacific Coast groundfish fishery (68 FR 64860; November 17, 2003). At this time NMFS is considering revising the list of type-
The value of the fishery to the individual vessels and the individual fisher's ability to recover the costs associated with VMS varies widely between vessels and target fisheries. In part this is because the fishery is split between vessels targeting groundfish (directed OA fishery vessels) and vessels targeting other species but landing groundfish that were caught incidentally while targeting a non-groundfish species (incidental OA fishery vessels). The incidental commercial open access groundfish fishery consists of vessels fishing for Pacific halibut, California halibut, Dungeness crab, spot prawn, ridgeback prawn, California Sheephead, sea cucumber, pink shrimp, salmon and HMS that do not necessarily depend on revenue from the sale of groundfish as their a major source of income. However, it's difficult to segregate the fishery into directed and incidental vessels, and vessels may move between the categories with the choice depending on the intention of the fisher. Over the course of a year or during a single trip, a fisher may engage in different strategies and may switch
Incidental fixed gear open access fishers who only land small amounts of incidentally caught groundfish may well choose to discard incidentally caught groundfish, rather than incur the cost of VMS and the burden of installation. Similarly, some fixed gear fishers may also choose to stay in state waters throughout the year rather than incur the cost of VMS and the burden of installation. NMFS recognizes that those vessels that are more actively engaged in the directed open access fishery and open access trawl fisheries will likely incur higher VMS costs than those that are not actively engaged in the directed open access fishery. However, without depth-based management, the open access fishery would likely be managed under very restrictive cumulative trip limits and seasons, which would result in much lower gross revenues for directed open access vessels, and greater restriction for incidental fishers.
No changes were made from the regulatory text presented in the proposed rule as a result of the comments. One minor edit to remove the word “and” was made in § 660.312 (d)(4)(vii).
NMFS has determined that this final rule is consistent with the FMP and with the Magnuson-Stevens Act and other applicable laws.
This final rule has been determined to be not significant for purposes of Executive Order 12866.
A final regulatory flexibility analysis (FRFA) was prepared pursuant to 5 U.S.C. 604(a). The FRFA incorporates the economic impacts described in the IRFA, a summary of the significant issues raised by the public comments in response to the IRFA, NMFS responses to those comments, and a summary of the analyses completed to support the action. A copy of the complete FRFA is available from NMFS (see
The VMS units that are currently type-approved for this fishery range in cost and service features. This range allows the vessel owner flexibility in choosing the model that best fits the needs of their vessel. Vessels that have already purchased VMS transceiver units for other fisheries or for personal purposes have been given consideration. Vessels will be allowed to retain existing VMS transceivers provided they are on the list of type-approved models and have been upgraded, if necessary, to the level required for the fishery. Per vessel costs for a transceiver unit with installation are $1,200-$2,700 ($3,800 with a computer that meets the minimum specifications) in Year 1, and $250-$625 in subsequent years. Annual operating cost to harvesters include: maintenance $60-$160, and transmission fees $192-$730. Estimated purchase cost of VMS services to the fishing industry if all vessels remain in the fishery is $2,241,120 - $7,293,300 in year 1, and $309,120 - $1,175,300 in subsequent years. The added cost of VMS may result in vessels, likely those vessels with the lowest ex-vessel revenue from groundfish, choosing to not retain groundfish to avoid VMS
The benefits of VMS to the fishery participants include the potential for future increases in groundfish catch because the likelihood of Rockfish Conservation Area (RCA) integrity being maintained is increased. This would result in greater stability in the fishery and be of greatest benefit to fishers with a high degree of dependency on groundfish. VMS would allow for greater flexibility in the use of management rules, because accurate pot, longline, non-groundfish trawl, line and net gear fishing location data will be readily available for modeling total catch and making groundfish management decisions. VMS data could be used along with declaration reports, observer data, survey information, and fish ticket data to better refine estimates of total fishing mortality and reduce the uncertainty in managing the fishery inseason to stay within the harvest guidelines and OYs. For vessels that participate in the incidental open access fisheries, accurate VMS fishing location data may be beneficial to non-groundfish target fisheries management. Because pink shrimp vessels are currently permitted to fish in the RCAs, there is no increased benefit to the pink shrimp fishery over status quo, but there is benefit to the groundfish fishers from the increased protection that this provision will provide to groundfish Essential Fish Habitat.
Vessels required to carry VMS transceiver units will provide installation/activation reports, hourly position reports, exemption reports, and declaration reports. The installation and activation reports include contact information from open access vessels because there are no Federal permit requirements for open access fishery participants. Having contact information is necessary in the event that there are transmission problems, where NMFS will need to have ready access to contact information and installation information. The submission of declaration reports was initially proposed as per trip reports. Following consultation with fishery participants, it was determined that the needs of NMFS OLE and the United States Coast Guard (USCG) could be met with less frequently made declaration reports. Therefore, it was determined that a declaration report identifying the type of gear being used by a vessel would remain valid until revised by the vessel operator or an exemption report was sent. This results in a significant reduction in the number of reports.
Following consultation with fishery participants prior to implementation of the pilot VMS program in the limited entry fisheries, it was determined that some vessel owners may prefer to reduce the costs of reporting when leaving the EEZ off the coasts of Washington, Oregon, and California. Because a substantial number of permitted vessels also fish in waters off Alaska and in areas outside the EEZ, and because vessels are commonly pulled out of the water for extended periods, a VMS hourly report exemption option was added, which included an exemption report.
During the development of the expanded VMS program, additional exemptions were considered and proposed for vessels that transfer the limited entry permit from the vessel and do not engage in any fishing off the West Coast for the remainder of the year, vessels that depart the open access fishery for an extended period after the end of the fishing year, and for vessels that have had an emergency situation that resulted in vessel damage such as fire, flooding or other extensive physical damage that would require the VMS or power source to be disconnected. The exemption reports allow flexibility to the industry participants while providing NMFS OLE with the information needed to determine why a position report is not being received from the vessel.
Declaration reports have been required since January 1, 2004, for non-groundfish trawl vessels that are used to fish in any trawl RCAs or the Cowcod Conservation Areas (CCAs). Requiring declaration reports for all fishing, not just fishing in any trawl RCA or the CCA, will be an additional burden for these vessels. Non-groundfish trawl gear includes vessels fishing for pink shrimp, spot and ridgeback prawns, California halibut and sea cucumber.
At the Council's June 2005 meeting, measures to protect groundfish EFH were considered, as mandated by the Magnuson-Stevens Act. Though the habitat protection measures have been developed as a separate action from the VMS program, monitoring measures such as VMS were considered as a tool for monitoring incursions into the many new habitat protection areas. As part of the habitat protection measures, the Council requested that VMS requirements for pink shrimp trawlers operating in the open access sector (those pink shrimp trawl vessels that are registered to limited entry permits are already required to have VMS) be included in the open access VMS analysis. Therefore, Alternative 4B was added to the EA/RIR/IRFA, with the difference being the inclusion of all pink shrimp trawl vessels.
A range of 13 alternatives, discussed in sections 2.0 and 4.0 of the EA for this action, was considered. The alternatives ranged from Alternative 1, status quo, which required declaration reports from open access non-groundfish trawl vessels that fish within a trawl RCA to Alternative 11, the preferred alternative being implemented by this final rule. The coverage levels identified as Alternatives 2-4A and 5A were based on different combinations of the open access gear groups. In order of coverage priority, the open access sectors initially identified as needing VMS coverage were: longline, groundfish pot, trawl (excluding shrimp), and line (excluding salmon). Alternative 2 requires all vessels using longline gear to have and use a VMS transceiver. Each of the Alternatives 3, 4 and 5A built on the previous alternative by adding the next open access gear group in order of priority.
At its September 2004 meeting, the Council recommended that NMFS expand the range to eight alternatives (Alternatives 1-4A, 5A, 5B, 6A and 7) and conduct further analysis. Alternative 5B was added and is based on Enforcement Consultants recommendations to the Council. Alternative 5B excludes vessels in fisheries where incidental catch of overfished species was considered to be very low; however, it includes salmon troll vessels. Alternative 6A, though modified by the Council, was based on the Groundfish Advisory Panel's (GAP) majority view. Under Alternative 6A, VMS would be required on any commercial fishing vessel for which an
At its April 2005 meeting, the Council specifically asked that NMFS examine new alternatives with thresholds for identifying vessels that land insignificant amounts of groundfish and low impact fisheries that could be considered as exceptions to the VMS requirement. In addition, concerns were expressed by the Council about of the cost of a VMS system to maintain the integrity of the RCA management regime for the open access fisheries being borne by industry. As a result of Council discussion, NMFS developed three new alternatives, identified as Alternatives 8-10. Alternative 8 was intended to exclude low impact OA fisheries from the VMS requirements. These low impact target fisheries and gear included: Dungeness crab pot, spot prawn pot, sea cucumber trawl, ridgeback prawn trawl, HMS line, and California sheephead pot. Alternative 9 was intended to identify vessels that directly targeted open access species. Vessels that land more than 500 lb (227 kilograms) of groundfish in a fishing year would have been included in the VMS and declaration requirements. Under Alternative 10, RCA management areas defined at 660.383 (c) would be discontinued and trip limits and seasons adjusted accordingly.
No Federal rules have been identified that duplicate, overlap, or conflict with this action.
This final rule contains a collection-of-information requirement subject to the Paperwork Reduction Act (PRA) and which has been approved by OMB under control number 0648-0478. Public reporting burden for this collection of information is estimated to average as follows: 4 minutes per response for each declaration report at an estimated time burden on the public of 2,848 hours annually for all 2,034 respondents; At 4 hours per response for installation (installation occurs one time every four years because VMS units have a 4 year service life) of the VMS transceiver unit and 5 minutes per response to send the installation/activation report with an estimated time burden to the public from all 2,034 respondents of 2,034 hours for installation of the VMS transceiver units and 41 hours annually for sending the installation/activation report; At 5 seconds per response for each hourly position report that is sent automatically by the VMS transceiver unit, the expected time burden on the public from all 2,034 respondents would be 24,747 hours annually; and at 4 minutes per response for each exemption report the expected time burden on the public from 500 respondents would be 64 hours annually. These estimates include the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection information. Send comments on these or any other aspects of the collection of information to NMFS at the
Notwithstanding any other provision of the law, no person is required to respond to, and no person shall be subject to penalty for failure to comply with, a collection of information subject to the requirements of the PRA, unless that collection of information displays a currently valid OMB control number.
NMFS issued Biological Opinions under the ESA on August 10, 1990, November 26, 1991, August 28, 1992, September 27, 1993, May 14, 1996, and December 15, 1999, pertaining to the effects of the Pacific Coast groundfish FMP fisheries on Chinook salmon (Puget Sound, Snake River spring/summer, Snake River fall, upper Columbia River spring, lower Columbia River, upper Willamette River, Sacramento River winter, Central Valley spring, California coastal), coho salmon (Central California coastal, southern Oregon/northern California coastal), chum salmon (Hood Canal summer, Columbia River), sockeye salmon (Snake River, Ozette Lake), and steelhead (upper, middle and lower Columbia River, Snake River Basin, upper Willamette River, central California coast, California Central Valley, south/central California, northern California, southern California). These biological opinions concluded that implementation of the FMP for the Pacific Coast groundfish fishery was not expected to jeopardize the continued existence of any endangered or threatened species under the jurisdiction of NMFS, or result in the destruction or adverse modification of critical habitat.
NMFS reinitiated a formal ESA section 7 consultation in 2005 for both the Pacific whiting midwater trawl fishery and the groundfish bottom trawl fishery. The December 19, 1999, Biological Opinion had defined an 11,000 Chinook incidental take threshold for the Pacific whiting fishery. During the 2005 Pacific whiting season, the 11,000 fish Chinook incidental take threshold was exceeded, triggering reinitiation. Also in 2005, new West Coast Groundfish Observer Program data became available, allowing NMFS to complete an analysis of salmon take in the bottom trawl fishery.
NMFS prepared a Supplemental Biological Opinion dated March 11, 2006, which addressed salmon take in both the Pacific whiting midwater trawl and groundfish bottom trawl fisheries. In its 2006 Supplemental Biological Opinion, NMFS concluded that catch rates of salmon in the 2005 whiting fishery were consistent with expectations considered during prior consultations. Chinook bycatch has averaged about 7,300 over the last 15 years and has only occasionally exceeded the reinitiation trigger of 11,000. Since 1999, annual Chinook bycatch has averaged about 8,450. The Chinook Evolutionarily Significant Units (ESUs) most likely affected by the whiting fishery have generally improved in status since the 1999 ESA section 7 consultation. Although these species remain at risk, as indicated by their ESA listing, NMFS concluded that the higher observed bycatch in 2005 does not require a reconsideration of its prior “no jeopardy” conclusion with respect to the fishery. For the groundfish bottom trawl fishery, NMFS concluded that incidental take in the groundfish fisheries is within the overall limits articulated in the Incidental Take Statement of the 1999 Biological Opinion. The groundfish bottom trawl limit from that opinion was 9,000 fish annually. NMFS will continue to monitor and collect data to analyze take levels. NMFS also reaffirmed its prior determination that implementation of the Groundfish FMP is not likely to jeopardize the continued existence of any of the affected ESUs.
Lower Columbia River coho (70 FR 37160, June 28, 2005) and the Southern Distinct Population Segment of green sturgeon (71 FR 17757, April 7, 2006) were recently listed as threatened under the ESA. As a consequence, NMFS has reinitiated its Section 7 consultation on the Council's Groundfish FMP. After reviewing the available information, NMFS concluded that, in keeping with
Under the Magnuson-Stevens Act at 16 U.S.C. 1852(b)(5), one of the voting members of the Council must be a representative of an Indian tribe with federally recognized fishing rights from the area of the Council's jurisdiction. Pursuant to Executive Order 13175, this action was developed through the Council process with meaningful collaboration with tribal officials from the area covered by the FMP. The tribal representative on the Council did not make a motion on this action for tribal fisheries because this action does not apply to tribal fishers.
Fisheries, Fishing, Indian fisheries.
16 U.S.C. 1801
(1)
(2)
(11)
(1) Longline or trap (or pot) gear fished by a vessel that has a limited entry permit affixed with a gear endorsement for that gear.
(2) Groundfish trawl.
(d)
(2)
(3)
(4)
(5)
(i) The operator of a vessel specified in paragraphs (d)(1), (d)(2), and (d)(3) of this section must provide a declaration report to NMFS OLE prior to leaving port on the first trip in which the vessel meets the requirement specified at § 660.312 (b) to have a VMS.
(ii) The vessel operator must send a new declaration report before leaving port on a trip in which a gear type that is different from the gear type most recently declared for the vessel will be used. A declaration report will be valid until another declaration report revising the existing gear declaration is received by NMFS OLE.
(iii) During the period of time that a vessel has a valid declaration report on file with NMFS OLE, it cannot fish with a gear other than a gear type declared by the vessel.
(iv) Declaration reports will include: the vessel name and/or identification number, and gear type (as defined in paragraph(d)(5)(iv)(A) of this section). Upon receipt of a declaration report, NMFS will provide a confirmation code or receipt to confirm that a valid declaration report was received for the vessel. Retention of the confirmation code or receipt to verify that a valid declaration report was filed and the declaration requirement was met is the responsibility of the vessel owner or operator. Vessels using non-trawl gear may declare more than one gear type, however, vessels using trawl gear may only declare one of the trawl gear types listed in paragraph (d)(5)(iv)(A) of this section on any trip and may not declare non-trawl gear on the same trip in which trawl gear is declared.
(A) One of the following gear types must be declared:
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(B) [Reserved]
(h) * * *
(1) Operate any vessel registered to a limited entry permit with a trawl endorsement and trawl gear on board in a applicable GCA (as defined at § 660.381 (d)), except for purposes of continuous transiting, with all groundfish trawl gear stowed in accordance with § 660.381(d), or except as authorized in the groundfish management measures published at § 660.381.
(2) Operate any vessel registered to a limited entry permit with a longline or trap (pot) endorsement and longline and/or trap gear onboard in an applicable GCA (as defined at § 660.382(c)), except for purposes of continuous transiting, with all groundfish longline and/or trap gear stowed in accordance with § 660.382(c) or except as authorized in the groundfish management measures at § 660.382.
(3) Operate any vessel with non-groundfish trawl gear onboard in any applicable GCA (as defined at § 660.383 (c)) except for purposes of continuous transiting, with all trawl gear stowed in accordance with § 660.383 (c), or except as authorized in the groundfish management measures published at § 660.383.
(4) Operate any vessel in an applicable GCA (as defined at § 660.383 (c)) that has non-trawl gear onboard and is not registered to a limited entry permit on a trip in which the vessel is used to take and retain or possess groundfish in the EEZ, possess or land groundfish taken in the EEZ, except for purposes of continuous transiting, with all groundfish non-trawl gear stowed in accordance with § 660.383(c), or except as authorized in the groundfish management measures published at § 660.383.
(i) * * *
(7) Fail to provide departure or cease fishing reports specified at § 660.314 (c)(2).
(8) Fail to meet the vessel responsibilities specified at § 660.314 (d).
(j) * * *
(1) Use any vessel required to operate a VMS unit under § 660.312 (b) unless that vessel carries a NMFS OLE type-approved mobile transceiver unit and complies with all the requirements described at § 660.312.
(6) Register the same VMS transceiver unit to more than one vessel at the same time.
(7) Falsify any VMS activation report or VMS exemption report that is authorized or required, as specified at § 660.312.
(8) Falsify any declaration report that is required, as specified at § 660.303.
(b)
(1) Any vessel registered for use with a limited entry permit that fishes in state or Federal waters seaward of the
(2) Any vessel that uses non-groundfish trawl gear to fish in the EEZ.
(3) Any vessel that uses open access gear to take and retain, or possess groundfish in the EEZ or land groundfish taken in the EEZ.
(d) * * *
(1) Obtain a NMFS OLE type-approved mobile transceiver unit and have it installed on board your vessel in accordance with the instructions provided by NMFS OLE. You may obtain a copy of the VMS installation and operation instructions from the NMFS OLE Northwest, VMS Program Manager upon request at 7600 Sand Point Way NE., Seattle, WA 98115-6349, phone: (206) 526-6133.
(2) Activate the mobile transceiver unit, submit an activation report at least 72 hours prior to leaving port on a trip in which VMS is required, and receive confirmation from NMFS OLE that the VMS transmissions are being received before participating in a fishery requiring the VMS. Instructions for submitting an activation report may be obtained from the NMFS, Northwest OLE VMS Program Manager upon request at 7600 Sand Point Way NE., Seattle, WA 98115-6349, phone: (206)526-6133. An activation report must again be submitted to NMFS OLE following reinstallation of a mobile transceiver unit or change in service provider before the vessel may participate in a fishery requiring the VMS.
(ii)
(3)
(4)
(iii)
(iv)
(v)
(vi)
(vii)
(f) * * *
(1) A permit owner may designate the vessel registration for a permit as “unidentified,” meaning that no vessel has been identified as registered for use with that permit. No vessel is authorize to use a permit with the vessel registration designated as “unidentified.” A vessel owner who removes a permit from his vessel and registers that permit as “unidentified” is not exempt from VMS requirements at § 660.312 unless specifically authorized by that section.
(b) * * *
(4)
* * * * *
(c) * * *
(4)
(i) The following restrictions apply to vessels operating north of 40°10′ N. lat.:
(A) A vessel may not have both groundfish trawl gear and non-groundfish trawl gear onboard simultaneously. A vessel may not have both bottom trawl gear and midwater trawl gear onboard simultaneously. A vessel may have more than one type of limited entry bottom trawl gear on board, either simultaneously or successively, during a cumulative limit period.
(B) If a vessel fishes exclusively with large or small footrope trawl gear during an entire cumulative limit period, the vessel is subject to the small or large footrope trawl gear cumulative limits and that vessel must fish seaward of the RCA during that limit period.
(C) If a vessel fishes exclusively with selective flatfish trawl gear during an entire cumulative limit period, then the vessel is subject to the selective flatfish trawl gear cumulative limits during that limit period, regardless of whether the vessel is fishing shoreward or seaward of the RCA.
(D) If more than one type of bottom trawl gear (selective flatfish, large footrope, or small footrope) is on board, either simultaneously or successively, at any time during a cumulative limit period, then the most restrictive cumulative limit associated with the bottom trawl gear on board during that cumulative limit period applies for the entire cumulative limit period, regardless of whether the vessel is fishing shoreward or seaward of the RCA.
(E) If a vessel fishes both north and south of 40°10′ N. lat. with any type of small footrope gear onboard the vessel at any time during the cumulative limit period, the most restrictive trip limit associated with the gear on board applies for that trip and will count toward the cumulative trip limit for that gear (See crossover provisions at § 660.370(h)(8).)
(F) Midwater trawl gear is allowed only for vessels participating in the primary whiting season.
(ii) The following restrictions apply to vessels operating south of 40°10′ N. lat.:
(A) A vessel may not have both groundfish trawl gear and non-groundfish trawl gear onboard simultaneously. A vessel may not have both bottom trawl gear and midwater trawl gear onboard simultaneously. A vessel may not have small footrope trawl gear and any other type of bottom trawl gear onboard simultaneously.
(B) For vessels using more than one type of trawl gear during a cumulative limit period, limits are additive up to the largest limit for the type of gear used during that period. (Example: If a vessel harvests 300 lb (136 kg) of chilipepper rockfish with small footrope gear, it may harvest up to 11,700 lb (5,209 kg) of chilipepper rockfish with large footrope gear during July and August 2007, because the largest cumulative limit for chilipepper rockfish during that period is 12,000 lb (5,443 kg)for large footrope gear.)
(C) If a vessel fishes both north and south of 40°10' N. lat. with any type of small footrope gear onboard the vessel at any time during the cumulative limit period, the most restrictive trip limit associated with the gear on board applies for that trip and will count toward the cumulative trip limit for that gear (See crossover provisions at § 660.370(h)(8).)
(d)
(4)
(i) It is unlawful to operate a vessel with trawl gear onboard within the trawl RCA, except for the purpose of continuous transiting, or when the use of trawl gear is authorized in this section. It is lawful to fish with groundfish trawl gear within the trawl RCA only under the following conditions: vessels fishing with mid-water trawl gear on Pacific whiting trips during the primary whiting season, provided a valid declaration report has been filed with NMFS OLE, as required at § 660.303(d); and vessels fishing with demersal seine gear between 38° N. lat. and 36° N. lat. shoreward of a boundary line approximating the 100 fm (183 m) depth contour as defined at § 660.393, provided a valid declaration report has been filed.
(ii) Trawl vessels may transit through an applicable GCA, with or without groundfish on board, provided all groundfish trawl gear is stowed either: below deck; or if the gear cannot readily be moved, in a secured and covered manner, detached from all towing lines, so that it is rendered unusable for fishing; or remaining on deck uncovered if the trawl doors are hung from their stanchions and the net is disconnected from the doors. These restrictions do not apply to vessels fishing with midwater trawl gear for whiting during a primary season.
(iii) It is unlawful to take and retain, possess, or land groundfish taken with limited entry trawl gear within the trawl RCA, unless otherwise authorized in this section.
(iv) If a vessel fishes in the trawl RCA, it may not participate in any fishing on that trip that is prohibited within the trawl RCA. [For example, if a vessel participates in the pink shrimp fishery within the RCA, the vessel cannot on the same trip participate in the DTS fishery seaward of the RCA.] Nothing in these Federal regulations supercedes any state regulations that may prohibit trawling shoreward of the fishery management area (3-200 nm).
(5)
(i) The following EFHCAs apply to vessels operating within the West Coast EEZ with bottom trawl gear:
(A)
(B)
(C)
(D)
(ii)
(c)
(4) * * *
(i) Fishing for “other flatfish” is permitted within the CCAs under the following conditions: when using no more than 12 hooks, “Number 2” or smaller, which measure no more than 11 mm (0.44 inches) point to shank, and up to two 1 lb (0.45 kg) weights per line; and provided a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE.
(ii) Fishing for rockfish and lingcod is permitted shoreward of the 20 fm (37 m) depth contour within the CCAs when trip limits authorize such fishing, and provided a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE.
(5)
(i) It is unlawful to operate a vessel with limited entry non-trawl gear in the non-trawl RCA, except for the purpose of continuous transit, or when the use of limited entry non-trawl gear is authorized in Part 660. It is unlawful to
(ii) Limited entry non-trawl vessels may transit through the non-trawl RCA, with or without groundfish on board, provided all groundfish non-trawl gear is stowed either: below deck; or if the gear cannot readily be moved, in a secured and covered manner, detached from all lines, so that it is rendered unusable for fishing.
(iii) The non-trawl RCA restrictions in this section apply to vessels registered to fixed gear limited entry permits fishing for species other than groundfish with non-trawl gear on trips where groundfish species are retained. Unless otherwise authorized by Part 660, a vessel may not retain any groundfish taken on a fishing trip for species other than groundfish that occurs within the non-trawl RCA. If a vessel fishes in a non-groundfish fishery in the non-trawl RCA, it may not participate in any fishing for groundfish on that trip that is prohibited within the non-trawl RCA. [For example, if a vessel participates in the salmon troll fishery within the RCA, the vessel cannot on the same trip participate in the sablefish fishery outside of the RCA.]
(iv) It is lawful to fish within the non-trawl RCA with limited entry fixed gear only under the following conditions: when fishing for “other flatfish” off California (between 42° N. lat. south to the U.S./Mexico border) using no more than 12 hooks, “Number 2” or smaller, which measure no more than 11 mm (0.44 inches) point to shank, and up to two 1-lb (0.91 kg) weights per line when trip limits authorize such fishing, provided a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE.
(8)
(b) * * *
(1)
(c)
(5) * * *
(i) Fishing for “other flatfish” is permitted within the CCAs under the following conditions: when using no more than 12 hooks, “Number 2” or smaller, which measure no more than 11 mm (0.44 inches) point to shank, and up to two 1 lb (0.45 kg) weights per line; and provided a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE.
(ii) Fishing for rockfish and lingcod is permitted shoreward of the 20 fm (37 m) depth contour within the CCAs when trip limits authorize such fishing, and provided a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE.
(6)
(i) It is unlawful to operate a vessel in the non-trawl RCA that has non-trawl gear onboard and is not registered to a limited entry permit on a trip in which the vessel is used to take and retain or possess groundfish in the EEZ, or land groundfish taken in the EEZ, except for the purpose of continuous transiting, or when the use of non-trawl gear is authorized in part 660.
(ii) On any trip on which a groundfish species is taken with non-trawl open access gear and retained, the open access non-trawl vessel may transit through the non-trawl RCA only if all groundfish non-trawl gear is stowed either: below deck; or if the gear cannot readily be moved, in a secured and covered manner, detached from all lines, so that it is rendered unusable for fishing.
(iii) The non-trawl RCA restrictions in this section apply to vessels taking and retaining or possessing groundfish in the EEZ, or landing groundfish taken in the EEZ. Unless otherwise authorized by Part 660, a vessel may not retain any groundfish taken on a fishing trip for species other than groundfish that occurs within the non-trawl RCA. If a vessel fishes in a non-groundfish fishery in the non-trawl RCA, it may not participate in any fishing for groundfish on that trip that is prohibited within the non-trawl RCA. [For example, if a vessel participates in the salmon troll fishery within the RCA, the vessel cannot on the same trip participate in the sablefish fishery outside of the RCA.]
(iv) Fishing for “other flatfish” off California (between 42° N. lat. south to the U.S./Mexico border) is permitted within the non-trawl RCA with fixed gear only under the following conditions: when using no more than 12 hooks, “Number 2” or smaller, which measure no more than 11 mm (0.44
(7)
(i) It is unlawful to operate in the non-groundfish trawl RCA with non-groundfish trawl gear onboard, except for the purpose of continuous transiting, or when the use of trawl gear is authorized in part 660. It is unlawful to take and retain, possess, or land groundfish taken with non-groundfish trawl gear within the non-trawl RCA, unless otherwise authorized in part 660.
(ii) Non-groundfish trawl vessels may transit through the non-groundfish trawl RCA, with or without groundfish on board, provided all non-groundfish trawl gear is stowed either: below deck; or if the gear cannot readily be moved, in a secured and covered manner, detached from all towing lines, so that it is rendered unusable for fishing; or remaining on deck uncovered if the trawl doors are hung from their stanchions and the net is disconnected from the doors.
(iii) The non-groundfish trawl RCA restrictions in this section apply to vessels taking and retaining or possessing groundfish in the EEZ, or landing groundfish taken in the EEZ. Unless otherwise authorized by Part 660, it is unlawful for a vessel to retain any groundfish taken on a fishing trip for species other than groundfish that occurs within the non-groundfish trawl RCA. If a vessel fishes in a non-groundfish fishery in the non-groundfish trawl RCA, it may not participate in any fishing on that trip that is prohibited within the non-groundfish trawl RCA. [For example, if a vessel participates in the pink shrimp fishery within the RCA, the vessel cannot on the same trip participate in the DTS fishery seaward of the RCA.] Nothing in these Federal regulations supercedes any state regulations that may prohibit trawling shoreward of the fishery management area (3-200 nm).
(iv) It is lawful to fish with non-groundfish trawl gear within the non-groundfish trawl RCA only under the following conditions:
(A) Pink shrimp trawling is permitted in the non-groundfish trawl RCA when a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE. Groundfish caught with pink shrimp trawl gear may be retained anywhere in the EEZ and are subject to the limits in Table 5 (North) and Table 5 (South) of this subpart.
(B) When the shoreward line of the trawl RCA is shallower than 100 fm (183 m), vessels using ridgeback prawn trawl gear south of 34°27.00′ N. lat. may operate out to the 100 fm (183 m) boundary line specified at § 660.393 when a valid declaration report as required at § 660.303(d) has been filed with NMFS OLE. Groundfish caught with ridgeback prawn trawl gear are subject to the limits in Table 5 (North) and Table 5 (South) of this subpart.
(10)
(i) The following EFHCAs apply to vessels operating within the West Coast EEZ with bottom trawl gear:
(A)
(B)
(C)
(ii)
(iii)
Environmental Protection Agency (EPA).
Proposed rule.
EPA is proposing to approve revisions to the Georgia State Implementation Plan, submitted by the Georgia Department of Natural Resources, through the Georgia Environmental Protection Division, on September 26, 2007. The revisions include modifications to Georgia's Air Quality Rules found at Chapter 391-3-20-.21, pertaining to rules for Enhanced Inspection and Maintenance (I/M). Enhanced I/M was required for 1-hour nonattainment areas classified as serious and above, under the Clean Air Act (CAA) as amended in 1990. The I/M program is a way to ensure that vehicles are maintained properly and verify that the emission control system is operating correctly, in order to reduce vehicle-related emissions. This action is being taken pursuant to section 110 of the CAA.
Written comments must be received on or before January 7, 2008.
Submit your comments, identified by Docket ID No. EPA-R04-OAR-2007-1059, by one of the following methods:
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Please see the direct final rule which is located in the Rules section of this
Stacy Harder, Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303-8960. The telephone number is (404) 562-8965. Ms. Harder can also be reached via electronic mail at
For additional information, see the direct final rule which is published in the Rules Section of this
Environmental Protection Agency (EPA).
Notice of Data Availability (NODA).
EPA is issuing this NODA in support of the proposed rule published on May 14, 2007, entitled Standards of Performance for Petroleum Refineries. EPA received a number of comments on the proposed rule and is in the process of evaluating those comments. During the review of recently received comments, we determined that data and analyses were inadvertently left out of the docket EPA-HQ-OAR-2007-0011.
This NODA notifies the public that we have added data and analyses to the docket and provides an additional comment period for the proposed rule. Comments on all aspects of this proposal are welcome.
Comments must be received on or before January 7, 2008.
Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2007-0011, by one of the following methods:
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To expedite review of your comments by Agency staff, you are encouraged to send a separate copy of your comments, in addition to the copy you submit to the official docket, to Mr. Robert B. Lucas, identified in the
Mr. Robert B. Lucas, U.S. EPA, Office of Air Quality Planning and Standards, Sector Policies and Programs Division, Coatings and Chemicals Group (E143-01), Research Triangle Park, NC 27711; telephone number: (919) 541-0884; e-mail address:
If you have any questions about CBI or the procedures for claiming CBI, please consult the person identified in the
Environmental protection, Air pollution control, New source performance standards, Reporting and recordkeeping requirements.
Defense Acquisition Regulations System, Department of Defense (DoD).
Proposed rule with request for comments.
DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to address limitations on the allowability of contractor costs associated with the leasing of Government equipment for display or demonstration. The proposed rule specifies that monies paid to the Government for the leasing of Government equipment are unallowable, except in the case of foreign military sales contracts.
Comments on the proposed rule should be submitted in writing to the address shown below on or before February 5, 2008, to be considered in the formation of the final rule.
You may submit comments, identified by DFARS Case 2007-D004, using any of the following methods:
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Comments received generally will be posted without change to
Mr. John McPherson, 703-602-0296.
DoD Directive 7230.8, Leases and Demonstrations of DoD Equipment,
This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.
DoD does not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601,
The Paperwork Reduction Act does not apply, because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501, et seq.
Government procurement.
Therefore, DoD proposes to amend 48 CFR parts 225 and 231 as follows:
1. The authority citation for 48 CFR parts 225 and 231 continues to read as follows:
41 U.S.C. 421 and 48 CFR Chapter 1.
2. Section 225.7303-2 is amended by revising paragraph (b) and adding paragraph (e) to read as follows:
(b) Costs not allowable under FAR Part 31 are not allowable in pricing FMS contracts, except as noted in paragraphs (c) and (e) of this subsection.
(e) The limitations on allowability of costs associated with leasing Government equipment, in 231.205-1, do not apply to FMS contracts.
3. Section 231.205-1 is added to read as follows:
(e) See 225.7303-2(e) for allowability provisions affecting foreign military sales contracts.
(f) Unallowable public relations and advertising costs also include monies paid to the Government associated with the leasing of Government equipment, including lease payments and reimbursement for support services, except for foreign military sales contracts as provided for at 225.7303-2.
Defense Acquisition Regulations System, Department of Defense (DoD).
Proposed rule with request for comments.
DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to revise and combine contract clauses addressing assumption of risk for loss under contracts involving the furnishing of aircraft to the Government. The proposed rule establishes requirements that apply consistently to all contract types.
Comments on the proposed rule should be submitted in writing to the address shown below on or before February 5, 2008 to be considered in the formation of the final rule.
You may submit comments, identified by DFARS Case 2007-D009, using any of the following methods:
Comments received generally will be posted without change to
Ms. Robin Schulze, 703-602-0326.
The clauses at DFARS 252.228-7001, Ground and Flight Risk, and DFARS 252.228-7002, Aircraft Flight Risk, are presently used in contracts involving the furnishing of aircraft to the Government. The clause at 252.228-7001 is used in negotiated fixed-price contracts, and the clause at 252.228-7002 is used in cost-reimbursement contracts. This proposed rule revises and combines the two clauses into a single ground and flight risk clause, to establish requirements that apply consistently to all contract types. In addition, a new section is added at DFARS 231.205-19 to specifically reference the treatment of insurance costs under the new clause and the existing clause at DFARS 252.217-7012, Liability and Insurance.
The proposed changes include—
○ Addition of a requirement for inclusion of the clause in all subcontracts;
○ Addition of a statement that the Government property clause is not applicable if the Government withdraws its self-insurance coverage;
○ Addition of a statement that commercial insurance costs or self-insurance charges that duplicate the Government's self-insurance are unallowable; and
○ Establishment of a share of loss for the contractor that is the lesser of $100,000 or 20 percent of the estimated contract cost or price. This is consistent with the contractor share of loss presently specified in the clause at 252.228-7002. The clause at 252.228-7001 presently prescribes a share of loss of $25,000 for the contractor.
This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.
DoD has prepared an initial regulatory flexibility analysis consistent with 5 U.S.C. 603. A copy of the analysis may be obtained from the point of contact specified herein. The analysis is summarized as follows:
The objective of the proposed rule is to clearly and consistently address the responsibilities of the Government and the contractor with regard to incidents that may occur under contracts involving the furnishing of aircraft to the Government. The proposed rule will apply to DoD contractors, and their subcontractors, under contracts for the acquisition, development, production, or servicing of aircraft. Excluded are contracts for activities strictly incidental to the normal operations of an aircraft; contracts awarded under FAR Part 12, Acquisition of Commercial Items; and contracts where a non-DoD customer does not assume risk for loss of or damage to the aircraft. The impact on small entities is unknown at this time. However, historically, most contractors engaged in this type of contract have been large business concerns.
DoD invites comments from small businesses and other interested parties. DoD also will consider comments from small entities concerning the affected DFARS subparts in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 2007-D009.
The Paperwork Reduction Act does not apply, because the rule does not impose any information collection requirements that require the approval of the Office of Management and Budget under 44 U.S.C. 3501,
Government procurement.
Therefore, DoD proposes to amend 48 CFR parts 228, 231, and 252 as follows:
1. The authority citation for 48 CFR parts 228, 231, and 252 continues to read as follows:
41 U.S.C. 421 and 48 CFR Chapter 1.
2. Section 228.370 is amended as follows:
a. By revising paragraph (b);
b. By removing paragraph (c); and
c. By redesignating paragraphs (d) through (f) as paragraphs (c) through (e) respectively. The revised text reads as follows:
(b)(1) Use the clause at 252.228-7001, Ground and Flight Risk, in solicitations and contracts for the acquisition, development, production, modification, maintenance, repair, or overhaul of aircraft, except those solicitations and contracts—
(i) That are strictly for activities incidental to the normal operations of the aircraft (e.g., refueling operations, minor non-structural actions not requiring towing such as replacing aircraft tires due to wear and tear);
(ii) That use FAR Part 12 procedures and are for the development or production of aircraft; or
(iii) For which a non-DoD customer (including a foreign military sales customer) has not agreed to assume the risk for loss or destruction of, or damages to, the aircraft.
(2) The clause at 252.228-7001 may be modified only as follows:
(i) Include a modified definition of “aircraft” if the contract covers other than conventional types of winged aircraft, i.e., helicopters, vertical take-off or landing aircraft, lighter-than-air airships, unmanned aerial vehicles, or other nonconventional aircraft. The modified definition should describe a stage of manufacture comparable to the standard definition.
(ii) Modify “in the open” to include “hush houses,” test hangars and comparable structures, and other designated areas.
(iii) Expressly define the “contractor's premises” where the aircraft will be located during and for contract performance. These locations may include contract premises which are owned or leased by the contractor or subcontractor, or premises where the contractor or subcontractor is a permittee or licensee or has a right to use, including Government airfields.
(iv) Revise paragraph (e)(3) of the clause to provide Government assumption of risk for transportation by conveyance on streets or highways when transportation is—
(A) Limited to the vicinity of contractor premises; and
(B) Incidental to work performed under the contract.
(3) Follow the procedures at PGI 228.370(b) when using the clause at 252.228-7001.
3. Section 231.205-19 is added to read as follows:
(e) In addition to the cost limitations in FAR 31.205-19(e), self-insurance and purchased insurance costs are subject to the requirements of the clauses at 252.217-7012, Liability and Insurance, and 252.228-7001, Ground and Flight Risk.
4. Section 252.228-7001 is revised to read as follows:
As prescribed in 228.370(b), use the following clause:
(a)
(1)
(i) Aircraft to be delivered to the Government under this contract (either before or after Government acceptance), including complete aircraft and aircraft in the process of being manufactured, disassembled, or reassembled; provided that an engine, portion of a wing or a wing is attached to a fuselage of the aircraft;
(ii) Aircraft, whether in a state of disassembly or reassembly, furnished by the Government to the Contractor under this contract, including all Government property installed, in the process of installation, or temporarily removed; provided that the aircraft and property are not covered by a separate bailment agreement;
(iii) Aircraft furnished by the Contractor under this contract (either before or after Government acceptance); or
(iv) Conventional winged aircraft, as well as helicopters, vertical take-off or landing aircraft, lighter-than-air airships, unmanned aerial vehicles, or other nonconventional aircraft specified in this contract.
(2)
(i) Business;
(ii) Operations at any one plant or separate location at which this contract is performed; or
(iii) Operations at a separate and complete major industrial operation in connection with the performance of this contract.
(3)
(4)
(i) For land-based aircraft, “flight” begins with the taxi roll from a flight line on the Contractor's premises and continues until the aircraft has completed the taxi roll in returning to a flight line on the Contractor's premises.
(ii) For seaplanes, “flight” begins with the launching from a ramp on the Contractor's premises and continues until the aircraft has completed its landing run and is beached at a ramp on the Contractor's premises.
(iii) For helicopters, “flight” begins upon engagement of the rotors for the purpose of take-off from the Contractor's premises and continues until the aircraft has returned to the ground on the Contractor's premises and the rotors are disengaged.
(iv) For vertical take-off or landing aircraft, “flight” begins upon disengagement from any launching platform or device on the Contractor's premises and continues until the aircraft has been engaged to any launching platform or device on the Contractor's premises.
(v) All aircraft off the Contractor's premises shall be considered to be in flight when on the ground or water for reasonable periods of time following emergency landings, landings made in performance of this contract, or landings approved in writing by the Contracting Officer.
(5)
(6)
(7)
(b)
(c)
(d)
(1) The Contracting Officer, when finding that the Contractor has failed to comply with paragraph (b) of this clause or that the aircraft is in the open under unreasonable conditions, shall notify the Contractor in writing and shall require the Contractor to make corrections within a reasonable time.
(2) Upon receipt of the notice, the Contractor shall promptly correct the cited conditions, regardless of whether there is agreement that the conditions are unreasonable.
(i) If the Contracting Officer later determines that the cited conditions were not unreasonable, an equitable adjustment shall be made in the contract price for any additional costs incurred in correcting the conditions.
(ii) Any dispute as to the unreasonableness of the conditions or the equitable adjustment shall be considered a dispute under the Disputes clause of this contract.
(3) If the Contracting Officer finds that the Contractor failed to act promptly to correct the cited conditions or failed to correct the conditions within a reasonable time, the Contracting Officer may terminate the Government's assumption of risk for any aircraft in the open under the cited conditions. The termination will be effective at 12:01 a.m. on the fifteenth day following the day the written notice is received by the Contractor.
(i) If the Contracting Officer later determines that the Contractor acted promptly to correct the cited conditions or that the time taken by the Contractor was not unreasonable, an equitable adjustment shall be made in the contract price for any additional costs incurred as a result of termination of the Government's assumption of risk.
(ii) Any dispute as to the timeliness of the Contractor's action or the equitable adjustment shall be considered a dispute under the Disputes clause of this contract.
(4) If the Government terminates its assumption of risk pursuant to the terms of this clause—
(i) The Contractor shall thereafter assume the entire risk for damage, loss, or destruction of the affected aircraft;
(ii) Any costs incurred by the Contractor (including the costs of the Contractor's self-insurance, insurance premiums paid to insure the Contractor's assumption of risk, deductibles associated with such purchased insurance, etc.) to mitigate its assumption of risk are unallowable costs; and
(iii) The Government Property clause of this contract is not applicable to the affected aircraft.
(5) The Contractor shall promptly notify the Contracting Officer when unreasonable conditions have been corrected.
(i) If, upon receipt of the Contractor's notice of the correction of the unreasonable conditions, the Government elects to again assume the risk of loss and relieve the Contractor of its liability for damage, loss, or destruction of the aircraft, the Contracting Officer will notify the Contractor of the Contracting Officer's decision to resume the Government's risk of loss. The Contractor shall be entitled to an equitable adjustment in the contract price for any insurance costs extending from the end of the third working day after the Government's receipt of the Contractor's notice of correction until the Contractor is notified that the Government will resume the risk of loss.
(ii) If the Government does not again assume the risk of loss and the unreasonable conditions have been corrected, the Contractor shall be entitled to an equitable adjustment for insurance costs, if any, extending after the third working day after the Government's receipt of the Contractor's notice of correction.
(6) The Government's termination of its assumption of risk of loss does not relieve the Contractor of its obligation to comply with all other provisions of this clause, including the combined regulation/instruction entitled “Contractor's Flight and Ground Operations.”
(e)
(1) Results from failure of the Contractor, due to willful misconduct or lack of good faith of any of the Contractor's managerial personnel, to maintain and administer a program for the protection and preservation of aircraft in the open and during operation in accordance with sound industrial practice, including oversight of such a program of a subcontractor;
(2) Is sustained during flight if either the flight or the flight crew members have not been approved in advance of any flight in writing by the Government Flight Representative, who has been authorized in accordance with the combined regulation/instruction entitled “Contractor's Flight and Ground Operations”;
(3) Occurs in the course of transportation by rail, or by conveyance on public streets, highways, or waterways, except for Government-furnished property;
(4) Is covered by insurance;
(5) Consists of wear and tear; deterioration (including rust and corrosion); freezing; or mechanical, structural, or electrical breakdown or failure, unless these are the result of other loss, damage or destruction covered by this clause. (This exclusion does not apply to Government-furnished property if damage consists of reasonable wear and tear or deterioration, or results from inherent vice, e.g., a known condition or design defect in the property); or
(6) Is sustained while the aircraft is being worked on and is a direct result of the work unless such damage, loss, or destruction would be covered by insurance which would have been maintained by the Contractor, but for the Government's assumption of risk.
(f)
(1) The Contractor assumes the risk of loss and shall be responsible for the Contractor's share of loss under the Government's self-insurance. That share is the lesser of—
(i) The first $100,000 of loss or damage to aircraft in the open, during operation, or in flight resulting from each separate event, except for reasonable wear and tear and to the extent the loss or damage is caused by negligence of Government personnel; or
(ii) Twenty percent of the estimated price or cost of this contract.
(2) If the Government elects to require that the aircraft be replaced or restored by the Contractor to its condition immediately prior to the damage, the equitable adjustment in the price authorized by paragraph (j) of this clause shall not include the dollar amount of the risk assumed by the Contractor.
(3) In the event the Government does not elect repair or replacement, the Contractor agrees to credit the contract price or pay the Government, as directed by the Contracting Officer, the lesser of—
(i) $100,000;
(ii) Twenty percent of the estimated price or cost of this contract; or
(iii) The amount of the loss.
(4) The costs incurred by the Contractor for its share of the loss and for insuring against that loss are unallowable costs, including but not limited to—
(i) The Contractor's share of loss under the Government's self-insurance;
(ii) The costs of the Contractor's self-insurance;
(iii) The deductible for any Contractor-purchased insurance;
(iv) Insurance premiums paid for Contractor-purchased insurance; and
(v) Costs associated with determining, litigating, and defending against the Contractor's liability.
(g)
(h)
(i)
(1) In the event of damage, loss, or destruction of aircraft in the open, during operation, or in flight, the Contractor shall take all reasonable steps to protect the aircraft from further damage, to separate damaged and undamaged aircraft, and to put all aircraft in the best possible order. Except in cases covered by paragraph (f)(2) of this clause, the Contractor shall furnish to the Contracting Officer a statement of—
(i) The damaged, lost, or destroyed aircraft;
(ii) The time and origin of the damage, loss, or destruction;
(iii) All known interests in commingled property of which aircraft are a part; and
(iv) The insurance, if any, covering the interest in commingled property.
(2) The Contracting Officer will make an equitable adjustment for expenditures made by the Contractor in performing the obligations under this paragraph.
(j)
(1) If prior to delivery and acceptance by the Government, aircraft is damaged, lost, or destroyed and the Government assumed the risk, the Government shall either—
(i) Require that the aircraft be replaced or restored by the Contractor to the condition immediately prior to the damage, in which event the Contracting Officer will make an equitable adjustment in the contract price and the time for contract performance; or
(ii) Terminate this contract with respect to the aircraft. Notwithstanding the provisions in any other termination clause under this contract, in the event of termination, the Contractor shall be paid the contract price for the aircraft (or, if applicable, any work to be performed on the aircraft) less any amount the Contracting Officer determines—
(A) It would have cost the Contractor to complete the aircraft (or any work to be performed on the aircraft) together with anticipated profit on uncompleted work; and
(B) Would be the value of the damaged aircraft or any salvage retained by the Contractor.
(2) The Contracting Officer shall prescribe the manner of disposition of the damaged, lost, or destroyed aircraft, or any parts of the aircraft. If any additional costs of such disposition are incurred by the Contractor, a further equitable adjustment will be made in the amount due the Contractor. Failure of the parties to agree upon termination costs or an equitable adjustment with respect to any aircraft shall be considered a dispute under the Disputes clause of this contract.
(k)
(l)
5. Section 252.228-7002 is removed and reserved.
6. Section 252.228-7003 is amended in the introductory text by removing “228.370(d)” and adding in its place “228.370(c)”.
7. Section 252.228-7005 is amended in the introductory text by removing “228.370(e)” and adding in its place “228.370(d)”.
8. Section 252.228-7006 is amended in the introductory text by removing “228.370(f)” and adding in its place “228.370(e)”.
Committee for Purchase From People Who Are Blind or Severely Disabled.
Proposed additions to the procurement list.
The Committee is proposing to add to the Procurement List products and a service to be furnished by nonprofit agencies employing persons who are blind or have other severe disabilities.
Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia, 22202-3259.
Kimberly M. Zeich, Telephone: (703) 603-7740, Fax: (703) 603-0655, or e-mail
This notice is published pursuant to 41 U.S.C 47(a)(2) and 41 CFR 51-2.3. Its purpose is to provide interested persons an opportunity to submit comments on the proposed actions.
If the Committee approves the proposed additions, the entities of the Federal Government identified in the notice for each product or service will be required to procure the products and service listed below from nonprofit agencies employing persons who are blind or have other severe disabilities.
I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were:
1. If approved, the action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will furnish the products and service to the Government.
2. If approved, the action will result in authorizing small entities to furnish the products and service to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the products and service proposed for addition to the Procurement List.
Comments on this certification are invited. Commenters should identify the statement(s) underlying the certification on which they are providing additional information.
The following products and services are proposed for addition to Procurement List for production by the nonprofit agencies listed:
Committee for Purchase From People Who Are Blind or Severely Disabled.
Additions to and Deletions from the Procurement List.
This action adds to the Procurement List services to be furnished by nonprofit agencies employing persons who are blind or have other severe disabilities, and deletes from the Procurement List products and services previously furnished by such agencies.
Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia 22202-3259.
Kimberly M. Zeich, Telephone: (703) 603-7740, Fax: (703) 603-0655, or e-mail
On October 12, 2007, the Committee for Purchase From People Who Are Blind or Severely Disabled published notice (72 FR 58051) of proposed additions to the Procurement List.
After consideration of the material presented to it concerning capability of qualified nonprofit agencies to provide the services and impact of the additions on the current or most recent contractors, the Committee has determined that the services listed below are suitable for procurement by the Federal Government under 41 U.S.C. 46-48c and 41 CFR 51-2.4.
I certify that the following action will not have a significant impact on a substantial number of small entities.
1. The action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will furnish the services to the Government.
2. The action will result in authorizing small entities to furnish the services to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the services proposed for addition to the Procurement List.
Accordingly, the following services are added to the Procurement List:
On October 12, 2007, the Committee for Purchase From People Who Are Blind or Severely Disabled published notice (72 FR 58051) of proposed deletions to the Procurement List.
After consideration of the relevant matter presented, the Committee has determined that the products and services listed below are no longer suitable for procurement by the Federal Government under 41 U.S.C. 46-48c and 41 CFR 51-2.4.
I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were:
1. The action may result in additional reporting, recordkeeping or other compliance requirements for small entities.
2. The action may result in authorizing small entities to furnish the products and services to the Government.
3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the products and services deleted from the Procurement List.
Accordingly, the following products and services are deleted from the Procurement List:
Pursuant to its authority under the Foreign-Trade Zones Act of June 18, 1934, as amended (19 U.S.C. 81a-81u), the Foreign-Trade Zones Board (the Board) adopts the following Order:
Pursuant to its authority under the Foreign-Trade Zones Act of June 18, 1934, as amended (19 U.S.C. 81a-81u), the Foreign-Trade Zones Board (the Board) adopts the following Order:
Pursuant to its authority under the Foreign-Trade Zones Act of June 18, 1934, as amended (19 U.S.C. 81a-81u), the Foreign-Trade Zones Board (the Board) adopts the following Order:
Pursuant to its authority under the Foreign-Trade Zones Act of June 18, 1934, as amended (19 U.S.C. 81a-81u), the Foreign-Trade Zones Board (the Board) adopts the following Order:
Import Administration, International Trade Administration, Department of Commerce.
In response to a request from an interested party, the Department of Commerce (the Department) is conducting an administrative review of the antidumping duty order on carbazole violet pigment 23 from India. The review covers one manufacturer/exporter, Alpanil Industries. The period of review is December 1, 2005, through November 30, 2006. We have preliminarily determined that Alpanil Industries made sales below normal value. We invite interested parties to comment on these preliminary results. Parties who submit comments in this review are requested to submit with each argument a statement of each issue and a brief summary of the argument.
December 7, 2007.
Yang Jin Chun or Richard Rimlinger, AD/CVD Operations, Office 5, Import Administration, International Trade Administration, U.S. Department of Commerce, 14
On December 29, 2004, we published in the
The merchandise subject to this antidumping duty order is carbazole violet pigment 23 (CVP-23) identified as Color Index No. 51319 and Chemical Abstract No. 6358 30 1, with the chemical name of diindolo [3,2-b:3¡¬,2¡¬-m] triphenodioxazine, 8,18-dichloro-5, 15-diethy-5, 15-dihydro-, and molecular formula of C34H22C12N4O2.
U.S. Customs and Border Protection (CBP) data we obtained indicate that CBP suspended the liquidation of only a portion of the U.S. sales of subject merchandise reported by Alpanil. Therefore, pursuant to section 751(a)(2)(A) of the Act, we limited this review to these sales of CVP 23.
To determine whether sales of CVP 23 from India to the United States were made at prices less than normal value, we compared the U.S. price to the normal value. For the price of sales by Alpanil to the United States, we used export price as defined in section 772(a) of the Act because the subject merchandise was first sold to an unaffiliated purchaser in the United States. Section 772(a) of the Act defines export price as “the price at which the subject merchandise is first sold (or agreed to be sold) before the date of importation by the producer or exporter of the subject merchandise outside of the United States to an unaffiliated purchaser in the United States or to an unaffiliated purchaser for exportation to the United States, as adjusted under
Section 772(c)(1)(C) of the Act requires the Department to increase export price by the amount of the countervailing duty imposed on the subject merchandise to offset an export subsidy. The countervailing-duty order on CVP 23 from India is currently in effect. See
Alpanil reported that it calculated its U.S. credit expenses by using the short-term U.S. interest rate that it derived from the U.S. Federal Reserve statistical release at
In order to determine whether there was a sufficient volume of sales in the comparison market to serve as a viable basis for calculating normal value, we compared the volume of home-market sales of the foreign like product in India to the volume of the U.S. sales of the subject merchandise in accordance with section 773(a)(1) of the Act. Based on this comparison of the aggregate quantities of the home-market and U.S. sales and absent any information that a particular market situation in the exporting country did not permit a proper comparison, we determined that the quantity of the foreign like product sold by Alpanil in the home market was greater than five percent of its aggregate volume of the sales of the subject merchandise and therefore sufficient to permit a proper comparison with the sales of the subject merchandise, pursuant to section 773(a)(1) of the Act. Thus, we determined that Alpanil's home market was viable as the comparison market during the period of review. See section 773(a)(1) of the Act. Therefore, in accordance with section 773(a)(1)(B)(i) of the Act, we based normal value for the respondent on the prices at which the foreign like product was first sold for consumption in India in the usual commercial quantities and in the ordinary course of trade and, to the extent practicable, at the same level of trade as the comparison-market sales. See the “Level of Trade” section below for more details.
We compared U.S. sales with sales of the foreign like product in the home market. Specifically, in making our comparisons, we attempted to make comparisons to weighted-average monthly home-market prices that were based on all sales of the identical product. Because no identical match was found, we matched similar merchandise on the basis of the comparison product which was closest in terms of the physical characteristics to the product sold in the United States. These characteristics, in the order of importance, are form, stability, dispersion, and tone. We made comparisons to weighted-average monthly home-market prices that were based on all sales of the most-similar product to the U.S. product. Because we were able to match all U.S. products to similar home-market products, we did not need to calculate the constructed value of the U.S. product as the basis for normal value.
We based normal value for Alpanil on the prices of the foreign like products sold to its comparison-market customers. When applicable, we made adjustments for differences in packing and movement expenses in accordance with sections 773(a)(6)(A) and (B) of the Act. Because we calculated normal value using sales of similar merchandise, we also made adjustments for differences in cost attributable to differences in physical characteristics of the merchandise pursuant to section 773(a)(6)(C)(ii) of the Act and 19 CFR 351.411. In addition, we made adjustments for differences in circumstances of sale to cover differences in payment terms in accordance with section 773(a)(6)(C)(iii) of the Act and 19 CFR 351.410. We made circumstance-of-sale adjustments by deducting home-market direct selling expenses from, and adding U.S. direct selling expenses to, normal value.
In accordance with section 773(a)(1)(B)(i) of the Act, to the extent practicable, we determined normal value based on sales in the home market at the same level of trade as the export-price sales. The normal-value level of trade is based on the starting price of the sales in the home market. For export-price sales, the U.S. level of trade is based on the starting price of the sales to the U.S. market.
We examined the differences in selling activities reported in Alpanil's responses to our requests for information. Alpanil reported two customer categories and three channels of distribution for its home-market sales. The two customer categories are end-users and distributors and the three channels of distribution are end-users, large distributors, and small distributors. Alpanil divided its channels of distribution based on the quantity of the customer's usual order. Alpanil mixed different customer categories within each channel of distribution and reported differences in selling functions for each channel. Alpanil reported that the selling activities in these channels were similar with no meaningful differences.
With respect to its home-market sales, Alpanil reported that it incurred expenses for the following selling functions and activities for all three channels of distribution: sales forecasting, sales promotion, inventory maintenance, order input/processing, direct sales personnel, and sales/marketing support. Alpanil reported that it paid commissions to consignees for sales to end-users and small distributors and provided after-sales services to distributors.
Alpanil reported two channels of distribution for two categories of U.S. customers, end-users and trading companies. Alpanil reported that the selling activities were identical for all U.S. customer categories. With respect to its export-price sales, Alpanil reported that it incurred expenses for sales forecasting, inventory maintenance, order input/processing, direct sales personnel, sales/marketing support, and freight and delivery.
Therefore, we find that sales in the U.S. market were made at one level of trade. We also find that the U.S. level of trade was the same as that of the home-market level of trade, given that Alpanil's selling functions associated with its home-market level of trade were similar with no meaningful differences to those associated with the U.S. market level of trade. They were similar with respect to sales forecasting, inventory maintenance, order input/processing, direct sales personnel, and sales/marketing support. Thus, we were able to match Alpanil's export-price sales to sales at the same level of trade in the home market and no level-of-trade adjustment was necessary.
As a result of our review, we preliminarily determine that the weighted-average dumping margin on CVP 23 from India for the period December 1, 2005, through November 30, 2006, for Alpanil is 23.41 percent.
We will disclose the calculations used in our analysis to parties to this review within five days of the date of publication of this notice. Any interested party may request a hearing within 30 days of the date of publication of this notice. Interested parties who wish to request a hearing or to participate in a hearing if a hearing is requested must submit a written request to the Assistant Secretary for Import Administration within 30 days of the date of publication of this notice. Requests should contain the following: (1) the party's name, address, and telephone number; (2) the number of participants; and (3) a list of issues to be discussed.
Issues raised in the hearing will be limited to those raised in the case and rebuttal briefs. Case briefs from interested parties may be submitted not later than 30 days after the date of publication of this notice of preliminary results of review. Rebuttal briefs from interested parties, limited to the issues raised in the case briefs, may be submitted not later than five days after the time limit for filing the case briefs or comments. Any hearing, if requested, will be held two days after the scheduled date for submission of rebuttal briefs. Parties who submit case briefs or rebuttal briefs in this proceeding are requested to submit with each argument a statement of the issue, a summary of the arguments not exceeding five pages, and a table of statutes, regulations, and cases cited. The Department will issue the final results of this administrative review, including the results of its analysis of issues raised in any such written briefs or at the hearing, if held, not later than 120 days after the date of publication of this notice.
The Department will determine, and CBP shall assess, antidumping duties on all appropriate entries. We intend to issue appropriate assessment instructions directly to CBP 15 days after publication of the final results of review. In accordance with 19 CFR 351.212(b)(1), we have calculated an importer-specific per-unit assessment amount by dividing the total dumping duties due by the number of units in the sales we analyzed.
The Department clarified its “automatic assessment” regulation on May 6, 2003 (68 FR 23954). This clarification will apply to entries of subject merchandise during the period of review produced by Alpanil for which it did not know its merchandise was destined for the United States. In such instances, we will instruct CBP to liquidate unreviewed entries at the all-others rate if there is no rate for the intermediate company(ies) involved in the transaction. For a full discussion of this clarification, see
The following deposit requirements will be effective upon publication of the notice of final results of administrative review for all shipments of CVP 23 from India entered, or withdrawn from warehouse, for consumption on or after the date of publication, as provided by section 751(a)(2)(C) of the Act: (1) The cash-deposit rate for Alpanil will be the rate established in the final results of this review; (2) for a previously investigated company, the cash-deposit rate will continue to be the company-specific rate published in
This notice also serves as a preliminary reminder to importers of their responsibility under 19 CFR 351.402(f) to file a certificate regarding the reimbursement of antidumping duties prior to liquidation of the relevant entries during this review period. Failure to comply with this requirement could result in the Department's presumption that reimbursement of antidumping duties occurred and the subsequent assessment of doubled antidumping duties.
These preliminary results of administrative review are issued and published in accordance with sections 751(a)(1) and 777(i)(1) of the Act.
Import Administration, International Trade Administration, Department of Commerce
December 7, 2007.
George Callen or Kristin Case, AD/CVD Operations, Office 5, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW, Washington, DC 20230; telephone: (202) 482-0180 and (202) 482-3174, respectively.
On April 19, 2007, the Department of Commerce (the Department) initiated the antidumping duty investigations of Glycine from India, Japan, and the Republic of Korea. See
On November 2, 2007, and November 9, 2007, Paras Intermediates Pvt. Ltd. (Paras), the only respondent that received a calculated rate in the preliminary determination of this investigation, made timely requests for a postponement of the final determination pursuant to section 735(a)(2) of the Act and extension of provisional measures with respect to glycine from India. See also 19 CFR 351.210(b)(2)(ii) and 19 CFR 351.210(e)(2). Paras requested postponement of the final determination in order to allow sufficient time to prepare for verification and to ensure the Department adequate time to conduct its verification, which was scheduled originally during a period which coincided with an important Indian holiday.
For the reasons identified by Paras and because there are no compelling reasons to deny the request, the Department is postponing the deadline for the final determination with respect to India under section 735(a)(2) of the Act to 135 days after the date on which the preliminary determination was published. The date of the final determination will be no later than March 21, 2008. The Department is also extending the provisional measures accordingly.
This notice is issued and published pursuant to sections 735(a)(2) and 771(i)(1) of the Act and 19 CFR 351.210(g).
Import Administration, International Trade Administration, Department of Commerce.
In response to requests from United States Steel Corporation (petitioner), Nucor Corporation (Nucor), and G Steel Public Company Limited (G Steel), the Department of Commerce (the Department) is conducting an administrative review of the antidumping duty order on certain hot-rolled carbon steel flat products (hot-rolled steel) from Thailand. With regard to the two Thai companies that are subject to this administrative review, G Steel and Nakornthai Strip Mill Public Company Limited (NSM), we preliminarily determine that sales of subject merchandise produced by G Steel have not been made at less than normal value (NV) and that NSM did not have any shipments, entries, or sales of subject merchandise during the period of review (POR). Therefore, this administrative review covers imports of subject merchandise produced and exported by G Steel, and we are preliminarily rescinding the review with respect to NSM. For a full discussion of the intent to rescind with respect to NSM, see the “Notice of Intent to Rescind in Part” section of this notice below. We invite interested parties to comment on these preliminary results. Parties that submit comments are requested to submit with each argument (1) a statement of the issue(s), (2) a brief summary of the argument(s), and (3) a table of authorities.
December 7, 2007.
Dena Crossland or Stephen Bailey, AD/CVD Operations, Office 7, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW, Washington, DC 20230; telephone: (202) 482-3362 or (202) 482-0193, respectively.
On November 29, 2001, the Department published the antidumping duty order on hot-rolled steel from Thailand.
In accordance with 19 CFR 351.213(b)(1), on November 28, 2006, petitioner requested that we conduct an administrative review of NSM's sales of subject merchandise. On November 30, 2006, Nucor, a domestic interested party, requested an administrative review of NSM's or NSM's affiliate's sales of subject merchandise, and G Steel requested an administrative review of its sales of subject merchandise. On December 27, 2006, the Department published in the
On January 3, 2007, the Department issued its antidumping duty questionnaire to G Steel and NSM. G Steel submitted its section A questionnaire response (section A response) on February 7, 2007, and its section B and C questionnaire responses on February 21, 2007 (section B&C responses). On January 4, 2007, the Department informed G Steel by telephone that it was not required to submit a Section D response at that time.
On March 26, 2007, petitioner and Nucor requested that the Department initiate a sales-below-cost investigation of home market (HM) sales made by G Steel, which the Department did on May 30, 2007.
On June 20, 2007, the Department issued its first sections A through C supplemental questionnaire to G Steel, and received G Steel's response (first sections A through C supplemental response) on July 11, 2007.
On June 27, 2007, in response to the Department's Cost Initiation Memorandum, G Steel submitted its section D questionnaire response.
On August 1, 2007, the Department issued its first section D supplemental questionnaire to G Steel, and received G Steel's response on August 15, 2007 (first section D supplemental response). On August 9, 2007, the Department issued its second sections A through C supplemental questionnaire to G Steel, and received G Steel's response on August 27, 2007 (second sections A through C supplemental response). In the first and second sections A through C supplemental questionnaires, the Department requested information about G Steel's relationship with NSM.
On July 24, 2007, the Department extended the due date for the preliminary results 120 days from August 2, 2007, until November 30, 2007.
The POR is November 1, 2005, through October 31, 2006.
For purposes of this order, the products covered are certain hot-rolled carbon steel flat products of a rectangular shape, of a width of 0.5 inch or greater, neither clad, plated, nor coated with metal and whether or not painted, varnished, or coated with plastics or other non-metallic substances, in coils (whether or not in successively superimposed layers), regardless of thickness, and in straight lengths, of a thickness of less than 4.75 mm and of a width measuring at least 10 times the thickness. Universal mill plate (
Specifically included within the scope of this order are vacuum degassed, fully stabilized (commonly referred to as interstitial-free (IF)) steels, high strength low alloy (HSLA) steels, and the substrate for motor lamination steels. IF steels are recognized as low carbon steels with micro-alloying levels of elements such as titanium or niobium (also commonly referred to as columbium), or both, added to stabilize carbon and nitrogen elements. HSLA steels are recognized as steels with micro-alloying levels of elements such as chromium, copper, niobium, vanadium, and molybdenum. The substrate for motor lamination steels contains micro-alloying levels of elements such as silicon and aluminum.
Steel products to be included in the scope of this order, regardless of definitions in the Harmonized Tariff Schedule of the United States (HTSUS), are products in which: i) iron predominates, by weight, over each of the other contained elements; ii) the carbon content is 2 percent or less, by weight; and iii) none of the elements listed below exceeds the quantity, by weight, respectively indicated:
1.80 percent of manganese, or
2.25 percent of silicon, or
1.00 percent of copper, or
0.50 percent of aluminum, or
1.25 percent of chromium, or
0.30 percent of cobalt, or
0.40 percent of lead, or
1.25 percent of nickel, or
0.30 percent of tungsten, or
0.10 percent of molybdenum, or
0.10 percent of niobium, or
0.15 percent of vanadium, or
0.15 percent of zirconium.
All products that meet the physical and chemical description provided above are within the scope of this order unless otherwise excluded.
The following products, by way of example, are outside or specifically excluded from the scope of this order:
-Alloy hot-rolled steel products in which at least one of the chemical elements exceeds those listed above (including,
-Society of Automotive Engineers (SAE)/American Iron & Steel Institute (AISI) grades of series 2300 and higher.
-Ball bearing steels, as defined in the HTSUS.
-Tool steels, as defined in the HTSUS.
-Silico-manganese (as defined in the HTSUS) or silicon electrical steel with a silicon level exceeding 2.25 percent.
-ASTM specifications A710 and A736.
-USS abrasion-resistant steels (USS AR 400, USS AR 500).
-All products (proprietary or otherwise) based on an alloy ASTM specification (sample specifications: ASTM A506, A507).
-Non-rectangular shapes, not in coils, which are the result of having been processed by cutting or stamping and which have assumed the character of
The merchandise subject to this order is currently classified in the HTSUS at subheadings: 7208.10.15.00, 7208.10.30.00, 7208.10.60.00, 7208.25.30.00, 7208.25.60.00, 7208.26.00.30, 7208.26.00.60, 7208.27.00.30, 7208.27.00.60, 7208.36.00.30, 7208.36.00.60, 7208.37.00.30, 7208.37.00.60, 7208.38.00.15, 7208.38.00.30, 7208.38.00.90, 7208.39.00.15, 7208.39.00.30, 7208.39.00.90, 7208.40.60.30, 7208.40.60.60, 7208.53.00.00, 7208.54.00.00, 7208.90.00.00, 7211.14.00.90, 7211.19.15.00, 7211.19.20.00, 7211.19.30.00, 7211.19.45.00, 7211.19.60.00, 7211.19.75.30, 7211.19.75.60, and 7211.19.75.90.
Certain hot-rolled carbon steel flat products covered by this order, including: vacuum degassed fully stabilized; high strength low alloy; and the substrate for motor lamination steel may also enter under the following tariff numbers: 7225.11.00.00, 7225.19.00.00, 7225.30.30.50, 7225.30.70.00, 7225.40.70.00, 7225.99.00.90, 7226.11.10.00, 7226.11.90.30, 7226.11.90.60, 7226.19.10.00, 7226.19.90.00, 7226.91.50.00, 7226.91.70.00, 7226.91.80.00, and 7226.99.01.80. Subject merchandise may also enter under 7210.70.30.00, 7210.90.90.00, 7211.14.00.30, 7212.40.10.00, 7212.40.50.00, and 7212.50.00.00. Although the HTSUS subheadings are provided for convenience and CBP purposes, the written description of the merchandise under review is dispositive.
Pursuant to 19 CFR 351.213(d)(3), the Department may rescind an administrative review, in whole or only with respect to a particular exporter or producer, if the Secretary concludes that, during the period covered by the review, there were no entries, exports, or sales of the subject merchandise.
As provided in section 782(i) of the Tariff Act of 1930, as amended (the Act), and 19 CFR 351.307, we conducted sales and cost verifications of the questionnaire responses of G Steel, using standard verification procedures. Our sales verification results are outlined in the following memorandum: 1) Memorandum to the File, through Angelica Mendoza, Program Manager, and Richard O. Weible, Office Director, regarding the Verification of the Sales Response of G Steel Public Company Limited in the Antidumping Review of Certain Hot-Rolled Carbon Steel Flat Products from Thailand, dated October 15, 2007 (G Steel Sales Verification Report). The Department's cost verification results will be outlined in a forthcoming memorandum. A public version of the G Steel Sales Verification Report is on file in the Department's Central Records Unit (CRU) located in Room B-099 of the main Department of Commerce Building, 14
To determine whether sales of subject merchandise were made in the United States at less than fair value, we compared the export price (EP) to the NV, as described in the “Export Price” and “Normal Value” sections of this notice. In accordance with section 777A(d)(2) of the Act, we calculated EP and compared these prices to weighted-average normal values or constructed values (CVs), as appropriate.
In accordance with section 771(16) of the Act, we considered all products produced by G Steel covered by the descriptions in the “Scope of the Order” section of this notice to be foreign like products for the purpose of determining appropriate product comparisons to G Steel's U.S. sale of the subject merchandise.
We have relied on the following eleven criteria to match U.S. sales of the subject merchandise to sales in Thailand of the foreign like product: paint, quality, carbon, yield strength, thickness, width, cut-to-length vs. coil, temper rolled, pickled, edge trim, and patterns in relief. We noted at the sales verification that the yield strength data reported in the HM and U.S. sales databases did not accurately reflect the minimum yield strengths for a certain sample of HM and U.S. sales that we examined.
In accordance with section 772 of the Act, we calculate either an EP or a constructed export price (CEP), depending on the nature of each sale. Section 772(a) of the Act defines EP as the price at which the subject merchandise is first sold by the foreign exporter or producer before the date of
We calculated EP based on prices charged to the first unaffiliated U.S. customer. We used the contract date as the date of sale.
To determine whether there is a sufficient volume of sales in the HM to serve as a viable basis for calculating NV, we compared G Steel's volume of HM sales of the foreign like product to the volume of the U.S. sale of the subject merchandise, in accordance with section 773(a)(1)(B) of the Act. Because G Steel's aggregate volume of HM sales of the foreign like product was greater than five percent of its aggregate volume of the U.S. sales for the subject merchandise, we determined the HM was viable.
G Steel reported that it made sales in the HM to affiliated and unaffiliated customers. G Steel reported downstream sales to certain affiliated customers.
Sales to affiliated customers in the HM for which G Steel did not report a downstream sale that were not made at arm's length were excluded from our analysis.
On May 30, 2007, after a request from petitioner and Nucor, the Department initiated a sales-below-cost investigation of G Steel because both petitioner and Nucor provided a reasonable basis to believe or suspect that G Steel is selling hot-rolled steel in Thailand at prices below the cost of production (COP).
In accordance with section 773(b)(3) of the Act, we calculated the weighted-average COP for each model based on the sum of G Steel's material and fabrication costs for the foreign like product, plus amounts for selling expenses, general and administrative (G&A) expenses, interest expenses and packing costs.
We relied on the COP information provided by G Steel except for the following adjustments:
1. We recalculated G Steel's skin pass costs (KVOH) to account for the skin passing done at G Steel's own plant during the POR.
2. We recalculated G Steel's scrap offset (TOTSCRAP) based on the net production quantity.
3. We revised G Steel's G&A expense ratio (GNA) by excluding service fees and a reversal of accrued interest.
For further details regarding these adjustments,
We compared the weighted-average COP figures to the HM sales prices of the foreign like product, as required under section 773(b) of the Act, to determine whether these sales had been made at prices below COP. On a product-specific basis, we compared COP to HM prices, less any applicable billing adjustments, movement charges, direct and indirect selling expenses, and packing expenses.
In determining whether to disregard HM sales made at prices below the COP, we examined, in accordance with sections 773(b)(1)(A) and (B) of the Act, whether such sales were made in substantial quantities within an extended period of time, and whether such sales were made at prices which permitted the recovery of all costs within a reasonable period of time in the normal course of trade. Pursuant to section 773(b)(2)(C) of the Act, where less than 20 percent of G Steel's HM sales of a given model were made at prices below the COP, we did not disregard any below-cost sales of that model because we determined that the below-cost sales were not made within an extended period of time in “substantial quantities.” Where 20 percent or more of G Steel's HM sales of a given model were at prices less than COP, we disregarded the below-cost sales because: (1) they were made within an extended period of time in “substantial quantities,” in accordance with sections 773(b)(2)(B) and (C) of the Act, and (2) based on our comparison of prices to the weighted-average COPs for the POR, they were at prices which would not permit the recovery of all costs within a reasonable period of time, in accordance with section 773(b)(2)(D) of the Act.
Our cost test for G Steel revealed that for HM sales of certain models, less than 20 percent of the sales of those models were made at prices below the COP. We therefore retained all such sales in our analysis and used them as the basis for determining NV. Our cost test also indicated that for certain models, more than 20 percent of the HM sales of those models were sold at prices below COP within an extended period of time and were at prices which would not permit the recovery of all costs within a reasonable period of time. Thus, in accordance with section 773(b)(1) of the Act, we excluded these below-cost sales from our analysis and used the remaining above-cost sales as the basis for determining NV.
As stated above in the “Product Comparisons” section, we find that pursuant to section 776(b) of the Act, the use of AFA is appropriate because we were unable to verify G Steel's reported yield strength data in either its HM or U.S. sales databases. Further, we find that G Steel did not act to the best of its ability in providing these data. Section 776(a)(2) of the Act provides that if an interested party: (A) withholds information that has been requested by
Section 782(d) of the Act provides that, if the Department determines that a response to a request for information does not comply with the request, the Department shall promptly inform the person submitting the response of the nature of the deficiency and shall, to the extent practicable, provide that person with an opportunity to remedy or explain the deficiency in light of the time limits established for the completion of the administrative review. Section 782(e) of the Act states that the Department shall not decline to consider information determined to be “deficient” under section 782(d) if all of the following requirements are met: (1) the information is submitted by the established deadline; (2) the information can be verified; (3) the information is not so incomplete that it cannot serve as a reliable basis for reaching the applicable determination; (4) the interested party has demonstrated that it acted to the best of its ability; and (5) the information can be used without undue difficulties.
Furthermore, section 776(b) of the Act provides that, if the Department finds that an interested party has failed to cooperate by not acting to the best of its ability to comply with a request for information, the Department may use an inference adverse to the interests of that party in selecting from among the facts otherwise available. In addition, the Statement of Administrative Action accompanying the Uruguay Round Agreements Act, H.R. Doc. 103-316, Vol. 1, at 870 (1994) (SAA), establishes that the Department may employ an adverse inference “to ensure that the party does not obtain a more favorable result by failing to cooperate to the best of its ability than if it had cooperated fully.”
In sections B and C of the Department's antidumping duty questionnaire, dated January 3, 2007, we requested that G Steel report the yield strengths (STRENGTH/U) in its U.S. and HM databases based on the minimum specified yield strength for the particular specification/grade. Furthermore, we requested that for sales to a particular specification/grade in which there is no minimum specified yield strength, G Steel classify the product in an appropriate yield strength category based on some reasonable methodology incorporating chemistry (
As noted above, section 776(b) of the Act provides that, if the Department finds that an interested party has failed to cooperate by not acting to the best of its ability to comply with a request for information, the Department may use an inference adverse to the interests of that party in selecting from among the facts otherwise available. A showing of bad faith is not required for imposition of an adverse inference. Rather, the question is whether the respondent put forth its maximum effort to produce the information requested. Inattentiveness or carelessness can be a basis for use of an adverse inference.
G Steel had the documents necessary to report complete and correct information in the necessary and requested manner and format. We find that G Steel did not put forth its maximum efforts in reporting yield strength. Rather, it simply classified all yield strengths the same. Accordingly, we find that G Steel did not act to the best of its ability in reporting necessary and accurate information. Therefore, we find it appropriate to use an inference that is adverse to G Steel's interest in selecting from among the facts otherwise available. Further, section 782(d) of the Act is inapplicable here because this is a situation where the respondent's information could not be verified. We did not discover the deficient response until verification. Moreover, G Steel did not meet all the criteria of section 782(e) of the Act.
As AFA, we matched net U.S. price to the highest individual HM NV with the most similar control number (CONNUM) to the U.S. sale. We calculated NV based on prices to unaffiliated customers and affiliated customers that passed the arm's-length test. We adjusted U.S. gross unit price for billing adjustments. We made deductions, where appropriate, for foreign inland freight and international freight pursuant to section 773(a)(6)(B) of the Act. In addition, we made adjustments for differences in cost attributable to differences in physical characteristics of the merchandise, pursuant to section 773(a)(6)(C)(ii) of the Act and 19 CFR 351.411, as well as for differences in circumstances of sale (COS) as appropriate, in accordance with section 773(a)(6)(C)(iii) of the Act and 19 CFR 351.410. Finally, we deducted the HM packing cost and added the U.S. packing cost in accordance with sections 773(a)(6)(A) and (B) of the Act.
For a detailed analysis of the Department's application of AFA, see the Analysis Memo, dated November 30, 2007.
In accordance with section 773(a)(4) of the Act, we based NV on CV if we were unable to find a contemporaneous comparison market match for the U.S. sale. We calculated CV based on the cost of materials and fabrication employed in producing the subject merchandise, SG&A expenses, interest expense and profit. We made the same adjustments to CV as outlined in the “Cost of Production Analysis” section above. In accordance with section 773(e)(2)(A) of the Act, we based SG&A expenses, interest and profit on the amounts G Steel incurred and realized in connection with the production and sale of the foreign like product in the ordinary course of trade for consumption in Thailand. For selling expenses, we used the weighted-average HM selling expenses. Where appropriate, we made COS adjustments to CV in accordance with section 773(a)(8) of the Act and 19 CFR 351.410.
In accordance with section 773(a)(1)(B) of the Act, to the extent practicable, we determine NV based on sales in the comparison market at the same level of trade (LOT) as the EP transaction or CEP transaction.
To determine whether comparison market sales are at a different LOT than U.S. sales, we examine stages in the marketing process and selling functions along the chain of distribution between the producer and the unaffiliated customer. If the comparison market sales are at a different LOT than EP sales, and the difference affects price comparability, as manifested in a pattern of consistent price differences between sales on which NV is based and comparison market sales at the LOT of the export transaction, where possible, we make a LOT adjustment under section 773(a)(7)(A) of the Act.
In analyzing the differences in selling functions, we determine whether the LOTs identified by the respondent are meaningful.
To determine whether the comparison market sales were at different stages in the marketing process than the U.S. sale, we reviewed the channels of distribution in each market, including selling functions, class of customer (“customer category”), and the level of selling expenses for each type of sale. In this review, we obtained information from G Steel regarding the marketing stages involved in sales to the reported home and U.S. markets. G Steel reported one LOT with two channels of distribution in the HM: (1) sales to affiliated and unaffiliated trading companies and (2) sales to unaffiliated end users.
We examined the selling activities reported for each channel of distribution in the HM and we organized the reported selling activities into the following four selling functions: sales process and marketing support, freight and delivery, inventory maintenance and warehousing, and warranty and technical services. We found that G Steel's level of selling functions to its HM customers for each of the four selling functions did not vary significantly by channel of distribution.
In the U.S. market, G Steel made sales of subject merchandise through one channel of distribution and it claimed only one LOT for its sales in the United States.
We then compared the selling functions performed by G Steel on its EP sale to the selling functions provided in the HM. We found that G Steel provides significant selling activities in the HM related to the sales process and marketing support selling functions, as well as warranty and technical service selling functions, which it does not provide for the U.S. market customer. For instance, G Steel stated that it regularly undertakes sales forecasting and market research for the HM, but there was no sales forecasting or marketing research done for the U.S. market during the POR.
Based upon our analysis, we preliminarily determine that the EP and the starting price of HM sales differ significantly with respect to sales process and marketing support selling functions (
We made currency conversions pursuant to 19 CFR 351.415 based on the exchange rates in effect on the date of the U.S. sale, as certified by the Federal Reserve Bank.
As a result of our review, we preliminarily determine the weighted-average dumping margin for the period November 1, 2005, through October 31, 2006, to be as follows:
The Department will disclose calculations performed in connection with these preliminary results of review within five days of the date of publication of this notice in accordance with 19 CFR 351.224(b). Interested parties may submit case briefs and/or written comments no later than 30 days after the date of issuance of the Memorandum to the File, through Peter Scholl, Lead Accountant, and Neal Halper, Office Director, Verification of the Cost Response of G Steel Public Company Limited (G Steel Cost Verification Report).
Upon completion of this review the Department shall determine, and CBP shall assess, antidumping duties on all appropriate entries. Pursuant to 19 CFR 351.212(b)(1), the Department calculates an assessment rate for each importer of the subject merchandise for each respondent. The Department intends to issue assessment instructions to CBP 15 days after the date of publication of the final results of review.
The Department clarified its “automatic assessment” regulation on May 6, 2003 (68 FR 23954).
The following cash deposit requirements will be effective upon publication of the final results of this administrative review for all shipments of the subject merchandise entered, or withdrawn from warehouse, for consumption on or after the publication date of the final results of this administrative review, as provided by section 751(a)(1) of the Act: (1) the cash deposit rate for the reviewed company will be the rate listed in the final results of review; (2) for previously investigated companies not listed above, the cash deposit rate will continue to be the company-specific rate published for the most recent period; (3) if the exporter is not a firm covered in this review, a prior review, or the original less-than-fair-value (LTFV) investigation, but the manufacturer is, the cash deposit rate will be the rate established for the most recent period for the manufacturer of the merchandise; and (4) the cash deposit rate for all other manufacturers or exporters will continue to be the all-others rate of 3.86 percent, which is the all-others rate established in the LTFV investigation.
This notice also serves as a preliminary reminder to importers of their responsibility under 19 CFR 351.402(f)(2) to file a certificate regarding the reimbursement of antidumping duties prior to liquidation of the relevant entries during this review period. Failure to comply with this requirement could result in the Secretary's presumption that reimbursement of antidumping duties occurred and the subsequent assessment of double antidumping duties.
We are issuing and publishing this notice in accordance with sections 751(a)(1) and 777(i)(1) of the Act.
Import Administration, International Trade Administration, Department of Commerce.
On June 6, 2007, the Department of Commerce published the preliminary results of the administrative review of the antidumping duty order on certain polyester staple fiber from Taiwan. We gave interested parties an opportunity to comment on the preliminary results. Based on our analysis of the comments received and an examination of our calculations, we have made certain changes for the final results. The final weighted-average dumping margin for Far Eastern Textile Limited is listed below in the “Final Results of the Review” section of this notice.
Devta Ohri or Brandon Farlander, Office 1, AD/CVD Operations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 482-3853 and (202) 482-0182, respectively.
On June 6, 2007, the Department of Commerce (“the Department”) published in the
On October 24, 2007, we received case briefs from Wellman, Inc. and Invista, S.a.r.l. (collectively, “the petitioners”), and Far Eastern Textile Limited (“FET” or “respondent”). On November 6, 2007, we received rebuttal briefs from the FET and Fibertex Corporation (“Fibertex” or “importer”), an importer of subject merchandise.
The period of review (“POR”) is May 1, 2005, through April 30, 2006.
For the purposes of this order, the product covered is certain polyester staple fiber (“PSF”). PSF is defined as synthetic staple fibers, not carded, combed or otherwise processed for spinning, of polyesters measuring 3.3 decitex (3 denier, inclusive) or more in diameter. This merchandise is cut to lengths varying from one inch (25 mm) to five inches (127 mm). The merchandise subject to this order may be coated, usually with a silicon or other finish, or not coated. PSF is generally used as stuffing in sleeping bags, mattresses, ski jackets, comforters, cushions, pillows, and furniture. Merchandise of less than 3.3 decitex (less than 3 denier) currently classifiable under the Harmonized Tariff Schedule of the United States (“HTSUS”) at subheading 5503.20.00.25
The merchandise subject to this order is currently classifiable in the HTSUS at subheadings 5503.20.00.45 and 5503.20.00.65. Although the HTSUS subheadings are provided for convenience and customs purposes, the written description of the merchandise under order is dispositive.
All issues raised in the case and rebuttal briefs by parties to this review are addressed in the December 3, 2007, “Issues and Decision Memorandum for the Sixth Antidumping Duty Administrative Review of Certain Polyester Staple Fiber from Taiwan” (“Decision Memorandum”), which is hereby adopted by this notice. Attached to this notice as an appendix is a list of the issues which parties have raised and to which we have responded in the Decision Memorandum. Parties can find a complete discussion of all issues raised in this review and the corresponding recommendations in this public memorandum, which is on file in the Department's Central Records Unit, Room B-099 of the main Department building (“CRU”). In addition, a complete version of the Decision Memorandum can be accessed directly on the Web at
To determine whether FET's sales of PSF to the United States were made at less than normal value (“NV”), we compared export price (“EP”) to the NV. We calculated EP, NV, constructed value (“CV”), and the cost of production (“COP”), based on the same methodologies used in the preliminary results, except that we did not weight-average FET's raw material costs for the final results.
Pursuant to section 773(b)(2)(C)(i) of the Act, where less than 20 percent of sales of a given product were at prices less than the COP, we did not disregard any below-cost sales of that product because we determined that the below-cost sales were not made in “substantial quantities.” Where 20 percent or more of a respondent's sales of a given product during the POR were at prices less than the COP, we determined such sales to have been made in “substantial quantities.”
We found that, for certain products, more than 20 percent of the respondent's home market sales were at prices less than the COP and, thus, the below-cost sales were made within an extended period of time and in substantial quantities. In addition, these sales were made at prices that did not permit the recovery of costs within a reasonable period of time. Therefore, we excluded these sales and used the remaining sales, if any, as the basis for determining NV, in accordance with section 773(b)(1) of the Act.
We find that the following dumping margin exists for the period May 1, 2005, through April 30, 2006:
The Department shall determine, and U.S. Customs and Border Protection (“CBP”) shall assess, antidumping duties on all appropriate entries.
FET has indicated that it was not the importer of record for any of its sales to the United States during the POR. FET reported the name of its U.S. customer as the importer of record for all U.S. sales. As such, FET did not report the entered value for any of its U.S. sales. Accordingly, we have calculated importer-specific assessment rates for the merchandise in question by aggregating the dumping margins calculated for all U.S. sales to each importer and dividing this amount by the total quantity of those sales. To determine whether the duty assessment rates were
Pursuant to 19 CFR 351.106(c)(2), we will instruct CBP to liquidate without regard to antidumping duties any entries for which the assessment rate is
The Department clarified its “automatic assessment” regulation on May 6, 2003.
The following deposit requirements are effective for all shipments of PSF from Taiwan entered, or withdrawn from warehouse, for consumption on or after the publication date of these final results, as provided by section 751(a)(1) of the Act: (1) The cash deposit rate for the reviewed company will be the rate listed above (except no cash deposit will be required if its weighted-average margin is
This notice serves as a final reminder to importers of their responsibility under 19 CFR 351.402(f)(2) to file a certificate regarding the reimbursement of antidumping duties prior to liquidation of the relevant entries during this review period. Failure to comply with this requirement could result in the Secretary's presumption that reimbursement of antidumping duties occurred and the subsequent assessment of doubled antidumping duties.
This notice also serves as a reminder to parties subject to administrative protective orders (“APOs”) of their responsibility concerning the return or destruction of proprietary information disclosed under APO in accordance with 19 CFR 351.305, which continues to govern business proprietary information in this segment of the proceeding. Timely written notification of the return/destruction of APO materials or conversion to judicial protective order is hereby requested. Failure to comply with the regulations and terms of an APO is a violation which is subject to sanction.
We are issuing and publishing these results and this notice in accordance with sections 751(a)(1) and 777(i)(1) of the Act.
List of Comments in the
Comment 1: Application of Total Adverse Facts Available.
Comment 2: Fluctuating Monthly Costs.
Corporation for National and Community Service.
Notice.
The Corporation for National and Community Service (hereinafter the “Corporation”), as part of its continuing effort to reduce paperwork and respondent burden, conducts a pre-clearance consultation program to provide the general public and federal agencies with an opportunity to comment on proposed and/or continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA95) (44 U.S.C. 3506(c)(2)(A)). This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirement on respondents can be properly assessed.
Currently, the Corporation is soliciting comments concerning its proposed renewal of its Senior Corps Grant Application (424-NSSC)—reference OMB Control Number 3045-0035, with an expiration date of April 30, 2008. The Corporation proposes to renew the Senior Corps Grant Application without significant changes. The modifications proposed by the Corporation for this renewal are limited to language changes to the application instructions:
• Remove the term “non-impact” work plan and replace with “work plan” to clarify and simplify for applicants;
• Update the “Required Documents” list to specify that applicants send the 990 Financial Form in the event that the organization does not meet the threshold for an A-133 audit.
Copies of the information collection can be obtained by contacting the office listed in the address section of this notice.
Written comments must be submitted to the individual and office listed in the
You may submit comments, identified by the title of the information collection activity, by any of the following methods:
(1) By mail sent to: Corporation for National and Community Service, Senior Corps; Attention Ms. Angela Roberts, Associate Director, Room 9401; 1201 New York Avenue, NW., Washington, DC 20525. (2) By hand delivery or by courier to the Corporation's mailroom on the 8th Floor at the mail address given in paragraph (1) above, between 9 a.m. and 4 p.m. Monday through Friday, except Federal holidays. (3) By fax to: (202) 606-3475, Attention Ms. Angela Roberts, Associate Director. (4) Electronically through the Corporation's e-mail address system:
Angela Roberts, (202) 606-6822 or by e-mail at
The Corporation is particularly interested in comments that:
Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Corporation, including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; Enhance the quality, utility, and clarity of the information to be collected; and
Minimize the burden of the collection of information on those who are expected to respond, including the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology (e.g., permitting electronic submissions of responses).
Comments submitted in response to this notice will be summarized and/or included in the request for Office of Management and Budget approval of the information collection request; they will also become a matter of public record.
Department of Defense.
Notice.
Under the provisions of the Federal Advisory Committee Act of 1972, (5 U.S.C. Appendix, as amended), the Sunshine in the Government Act of 1976 (5 U.S.C. 552b, as amended), and 41 CFR 102-3.65, the Department of Defense gives notice that it will renew the charter for the Board of Visitors National Defense Intelligence College.
The purpose of the Board of Visitors for the National Defense Intelligence College (hereafter referred to as the Board of Visitors) is to provide the Secretary of Defense independent advice on matters relating to the mission of the National Defense Intelligence College. The Director, Defense Intelligence Agency may act upon the Board of Visitor's advice and recommendations
The Board of Visitors shall be comprised of no more than twelve members, and the Department of Defense, to achieve a balanced membership, will include a cross-section of experts and eminent authorities in the fields of national intelligence, defense and academia.
The Secretary of Defense approves the appointment of the members, and those who are not full-time Federal officers or employees are appointed as Special Government Employees under the authority of 5 U.S.C. 3109. With the exception of travel and per diem for official travel, the members shall server without compensation. The Director, Defense Intelligence Agency shall select the committee's chairperson from the Board of Visitors at large.
The Board of Visitors shall be authorized to establish subcommittees, as necessary and consistent with its mission, and these subcommittees or working groups shall operate under the provisions of the Federal Advisory Committee Act of 1972 (5 U.S.C., Appendix, as amended), the Sunshine in the Government Act of 1976 (5 U.S.C. 552b, as amended), and other appropriate Federal regulations.
Such subcommittees or workgroups shall not work independently of the chartered committee, and shall report all their recommendations and advice to the Board of Visitors for full deliberation and discussion. Subcommittees or workgroups have no authority to make decisions on behalf of the chartered committee nor can they report directly to the Department of Defense or any Federal officers or employees who are not members of the Board of Visitors.
The Board of Visitors shall meet at the call of the committee's Designated Federal Officer, in consultation with the Chairperson and the Director, Defense Intelligence Agency. The Designated Federal Officer, pursuant to DoD policy, shall be a full-time or permanent part-time DoD employee, and shall be appointed in accordance with established DoD policies and procedures. The Designated Federal Officer or duly appointed Alternate Designated Federal Officer shall attend all committee meetings and subcommittee meetings.
Pursuant to 41 CFR 102-3.105(j) and 102-3.140, the public or interested organizations may submit written statements to the Board of Visitors National Defense Intelligence College membership about the Panel's mission and functions. Written statements may be submitted at any time or in response to the stated agenda of planned meeting of the Board of Visitors National Defense Intelligence College.
All written statements shall be submitted to the Designated Federal Officer for the Board of Visitors National Defense Intelligence College, and this individual will ensure that the written statements are provided to the membership for their consideration. Contact information for the Board of Visitors National Defense Intelligence College's Designated Federal Officer can be obtained from the GSA's FACA Database—
The Designated Federal Officer, pursuant to 41 CFR 102-3.150, will announce planned meetings of the Board of Visitors National Defense Intelligence College. The Designated Federal Officer, at that time, may provide additional guidance on the submission of written statements that are in response to the stated agenda for the planned meeting in question.
Jim Freeman, DoD Committee Management Office, 703-601-2554, extension 128.
Department of Defense, Advisory Group on Electron Devices.
Notice.
The Department of Defense announces DoD Advisory Group on Electron Devices (AGED) closed session meeting.
The meeting will be held at 0900, Tuesday, January 9, 2008.
The meeting will be held at the QNA, 4100 N. Fairfax Drive, Suite 800, Arlington, VA 22203.
Ms. Aimee Steussy, QNA, 4100 N. Fairfax Drive, Suite 800, Arlington, VA 22203, 703-284-8357.
The mission of the Advisory Group is to provide advice to the Under Secretary of Defense for Acquisition, Technology and Logistics, to the Director of Defense Research and Engineering (DDR&E), and through the DDR&E to the Director, Defense Advanced Research Projects Agency and the Military Departments in planning and managing an effective and economical research and development program in the area of electron devices.
The AGED meeting will be limited to review of research and development efforts in electronics and photonics with a focus on benefits to national defense. These reviews may form the basis for research and development programs initiated by the Military Departments and Defense Agencies to be conducted by industry, universities or in government laboratories. The agenda for this meeting will include programs on molecular electronics, microelectronics, electro-optics, and electronic materials.
In accordance with section 10(d) of Pub. L. No. 92-463, as amended, (5 U.S.C. App. 2), it has been determined that this Advisory Group meeting concerns matters listed in 5 U.S.C. 552b(c)(1), and that accordingly, this meeting will be closed to the public.
Defense Acquisition Regulations System, Department of Defense (DoD).
Notice and request for comments regarding a proposed extension of an approved information collection requirement.
In compliance with Section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), DoD announces the proposed extension of a public information collection requirement and seeks public comment on the provisions thereof. DoD invites comments on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of DoD, including whether the information will have practical utility; (b) the accuracy of the estimate of the burden of the proposed information collection; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the information collection on respondents, including the use of automated collection techniques or other forms of information technology. The Office of Management and Budget (OMB) has approved this information collection requirement for use through March 31, 2008. DoD proposes that OMB extend its approval for use for three additional years.
DoD will consider all comments received by February 5, 2008.
You may submit comments, identified by OMB Control Number 0704-0248, using any of the following methods:
•
•
•
•
•
Comments received generally will be posted without change to
Mr. Dustin Pitsch, 703-602-8387. The information collection requirements addressed in this notice are available on the World Wide Web at:
This information collection includes the requirements of DFARS Appendix F, Material Inspection and Receiving Report; the related clause at DFARS 252.246-7000, Material Inspection and Receiving Report; and DD Forms 250, 250c, and 250-1. The clause at DFARS 252.246-7000 is used in contracts that require separate and distinct deliverables. The clause requires the contractor to prepare and furnish to the Government a material inspection and receiving report (DD Form 250) in a manner and to the extent required by DFARS Appendix F. The information in the report is required for material inspection and acceptance, shipping, and payment. The contractor may submit the information by using the Wide Area WorkFlow-Receipt and Acceptance electronic form.
Department of Education.
The IC Clearance Official, Regulatory Information Management Services, Office of Management, invites comments on the proposed information collection requests as required by the Paperwork Reduction Act of 1995.
Interested persons are invited to submit comments on or before February 5, 2008.
Section 3506 of the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35) requires that the Office of Management and Budget (OMB) provide interested Federal agencies and the public an early opportunity to comment on information collection requests. OMB may amend or waive the requirement for public consultation to the extent that public participation in the approval process would defeat the purpose of the information collection, violate State or Federal law, or substantially interfere with any agency's ability to perform its statutory obligations. The IC Clearance Official, Regulatory Information Management Services, Office of Management, publishes that notice containing proposed information collection requests prior to submission of these requests to OMB. Each proposed information collection, grouped by office, contains the following: (1) Type of review requested,
The Department of Education is especially interested in public comment addressing the following issues: (1) Is this collection necessary to the proper functions of the Department; (2) will this information be processed and used in a timely manner; (3) is the estimate of burden accurate; (4) how might the Department enhance the quality, utility, and clarity of the information to be collected; and (5) how might the
Requests for copies of the proposed information collection request may be accessed from
Comments regarding burden and/or the collection activity requirements should be electronically mailed to
This priority is:
Increasing student access to quality mental health care by developing innovative approaches to link local school systems with the local mental health system. A program funded under this absolute priority must include all of the following activities:
(1) Enhancing, improving, or developing collaborative efforts between school-based service systems and mental health service systems to provide, enhance, or improve prevention, diagnosis, and treatment services to students.
(2) Enhancing the availability of crisis intervention services, appropriate referrals for students potentially in need of mental health services, and ongoing mental health services.
(3) Providing training for the school personnel and mental health professionals who will participate in the program.
(4) Providing technical assistance and consultation to school systems and mental health agencies and families participating in the program.
(5) Providing linguistically appropriate and culturally competent services.
(6) Evaluating the effectiveness of the program in increasing student access to quality mental health services, and making recommendations to the Secretary about sustainability of the program.
Recipients of a grant under the Grants for the Integration of Schools and Mental Health Systems program are required to coordinate project activities with projects funded under the Department of Health and Human Services' Substance Abuse and Mental Health Services Administration's Mental Health Transformation State Infrastructure Grants (MHTSIG) program (CFDA 93.243), if a grantee's State receives a MHTSIG award. If a recipient of a grant under the Grants for the Integration of Schools and Mental Health Systems program has received or receives a grant under the Department of Education's Emergency Response and Crisis Management program, now known as the Readiness and Emergency Management for Schools (REMS) grant competition (CFDA 84.184E), the recipient must coordinate mental health service activities under this grant with those planned under its REMS grant. Projects funded by this program must complement, rather than duplicate, existing or ongoing efforts.
Former or current recipients under the Safe Schools/Healthy Students program (CFDA 84.184L) are not eligible to receive a Grant for the Integration of Schools and Mental Health Systems. Recipients of Safe Schools/Healthy Students awards are responsible for completing a scope of work under that program that is very similar to the activities required under the Grants for the Integration of Schools and Mental Health Systems program. By restricting the applicant pool to eliminate former or current grantees under the Safe Schools/Healthy Students program, we
Applicants may compete for both the Grants for the Integration of Schools and Mental Health Systems and Safe Schools/Healthy Students programs in the same year; if applicants are deemed eligible for funding in both grant competitions, the applicant will receive the larger and more comprehensive of the awards.
Applicants for an award under the Grants for the Integration of Schools and Mental Health Systems program must develop and submit with their applications a preliminary interagency agreement (IAA). The IAA must contain the signatures of an authorized representative of at least (1) one or more State or local educational agencies or Indian tribes; (2) one or more juvenile justice authorities; and (3) one or more State or local public mental health agencies. This preliminary IAA would confirm the commitment of these partners to complete the work under the proposed project, if funded. If the applicant is funded, recipients will complete a final IAA as required by section 5541(e) of the Elementary and Secondary Education Act of 1965, as amended (ESEA). The final IAA must be completed and submitted to us, signed by all parties, no later than 12 months after the award date.
Applications that do not include the proposed preliminary IAA with all of the required signatures will be rejected and not be considered for funding.
The final Interagency Agreement (IAA) must include a description of policies and procedures that would ensure appropriate parental or caregiver consent for any planned services, pursuant to State or local laws or other requirements.
Grant funds under this program must not be used to provide direct services to students.
The regulations in 34 CFR part 79 apply to all applicants except federally recognized Indian tribes.
Contingent upon the availability of funds and the quality of applications, we may make additional awards later in FY 2008 and in FY 2009 from the list of unfunded applicants from this competition.
The Department is not bound by any estimates in this notice.
1.
2. a.
b.
1.
You can contact ED Pubs at its Web site, also:
If you request an application from ED Pubs, be sure to identify this program or competition as follows: CFDA number 84.215M.
Individuals with disabilities can obtain a copy of the application package in an alternative format (e.g., Braille, large print, audiotape, or computer diskette) by contacting the person or team listed under
2.
3.
Applications for grants under this program may be submitted electronically using the Grants.gov Apply site (Grants.gov), or in paper format by mail or hand delivery. For information (including dates and times) about how to submit your application electronically, or in paper format by mail or hand delivery, please refer to section IV. 6.
We do not consider an application that does not comply with the deadline requirements.
Individuals with disabilities who need an accommodation or auxiliary aid in connection with the application process should contact the person listed under
4.
5.
6.
Applications for grants under this program may be submitted electronically or in paper format by mail or hand delivery.
a.
To comply with the President's Management Agenda, we are participating as a partner in the Governmentwide Grants.gov Apply site. The Grants for the Integration of Schools and Mental Health Systems, 84.215M, is included in this project. We request your participation in Grants.gov.
If you choose to submit your application electronically, you must use the Governmentwide Grants.gov Apply site at
You may access the electronic grant application for the Grants for the Integration of Schools and Mental Health Systems at
Please note the following:
• Your participation in Grants.gov is voluntary.
• When you enter the Grants.gov site, you will find information about submitting an application electronically through the site, as well as the hours of operation.
• Applications received by Grants.gov are date and time stamped. Your application must be fully uploaded and submitted and must be date and time stamped by the Grants.gov system no later than 4:30 p.m., Washington, DC time, on the application deadline date. Except as otherwise noted in this section, we will not consider your application if it is date and time stamped by the Grants.gov system later than 4:30 p.m., Washington, DC time, on the application deadline date. When we retrieve your application from Grants.gov, we will notify you if we are rejecting your application because it was date and time stamped by the Grants.gov system after 4:30 p.m., Washington, DC time, on the application deadline date.
• The amount of time it can take to upload an application will vary depending on a variety of factors, including the size of the application and the speed of your Internet connection. Therefore, we strongly recommend that you do not wait until the application deadline date to begin the submission process through Grants.gov.
• You should review and follow the Education Submission Procedures for submitting an application through Grants.gov that are included in the application package for this program to ensure that you submit your application in a timely manner to the Grants.gov system. You can also find the Education Submission Procedures pertaining to Grants.gov at
• To submit your application via Grants.gov, you must complete all steps in the Grants.gov registration process (see
• You will not receive additional point value because you submit your application in electronic format, nor will we penalize you if you submit your application in paper format.
• If you submit your application electronically, you must submit all documents electronically, including all information you typically provide on the following forms: Application for Federal Assistance (SF 424), the Department of Education Supplemental Information for SF 424, Budget Information—Non-Construction Programs (ED 524), and all necessary assurances and certifications. Please note that two of these forms—the SF 424 and the Department of Education Supplemental Information for SF 424—have replaced the ED 424 (Application for Federal Education Assistance).
• If you submit your application electronically, you must attach any narrative sections of your application as files in a .DOC (document), .RTF (rich text), or .PDF (Portable Document) format. If you upload a file type other than the three file types specified in this paragraph or submit a password-protected file, we will not review that material.
• Your electronic application must comply with any page-limit requirements described in this notice.
• After you electronically submit your application, you will receive from Grants.gov an automatic notification of receipt that contains a Grants.gov tracking number. (This notification indicates receipt by Grants.gov only, not receipt by the Department.) The Department then will retrieve your application from Grants.gov and send a second notification to you by e-mail. This second notification indicates that the Department has received your application and has assigned your application a PR/Award number (an ED-specified identifying number unique to your application).
• We may request that you provide us original signatures on forms at a later date.
If you are prevented from electronically submitting your application on the application deadline date because of technical problems with the Grants.gov system, we will grant you an extension until 4:30 p.m., Washington, DC time, the following business day to enable you to transmit your application electronically or by hand delivery. You also may mail your application by following the mailing instructions described elsewhere in this notice.
If you submit an application after 4:30 p.m., Washington, DC time, on the application deadline date, please contact the person listed under
The extensions to which we refer in this section apply only to the unavailability of, or technical problems with, the Grants.gov system. We will not grant you an extension if you failed to fully register to submit your application to Grants.gov before the application deadline date and time or if the technical problem you experienced is unrelated to the Grants.gov system.
b.
If you submit your application in paper format by mail (through the U.S. Postal Service or a commercial carrier), you must mail the original and two copies of your application, on or before the application deadline date, to the Department at the applicable following address:
Regardless of which address you use, you must show proof of mailing consisting of one of the following:
(1) A legibly dated U.S. Postal Service postmark.
(2) A legible mail receipt with the date of mailing stamped by the U.S. Postal Service.
(3) A dated shipping label, invoice, or receipt from a commercial carrier.
(4) Any other proof of mailing acceptable to the Secretary of the U.S. Department of Education.
If you mail your application through the U.S. Postal Service, we do not accept either of the following as proof of mailing:
(1) A private metered postmark.
(2) A mail receipt that is not dated by the U.S. Postal Service.
If your application is postmarked after the application deadline date, we will not consider your application.
The U.S. Postal Service does not uniformly provide a dated postmark. Before relying on this method, you should check with your local post office.
c.
If you submit your application in paper format by hand delivery, you (or a courier service) must deliver the original and two copies of your application by hand, on or before the application deadline date, to the Department at the following address: U.S. Department of Education, Application Control Center, Attention: (CFDA Number 84.215M), 550 12th Street, SW., Room 7041, Potomac Center Plaza, Washington, DC 20202-4260.
The Application Control Center accepts hand deliveries daily between 8 a.m. and 4:30 p.m., Washington, DC time, except Saturdays, Sundays, and Federal holidays.
If you mail or hand deliver your application to the Department—
(1) You must indicate on the envelope and—if not provided by the Department—in Item 11 of the SF 424 the CFDA number, including suffix letter, if any, of the competition under which you are submitting your application; and
(2) The Application Control Center will mail to you a notification of receipt of your grant application. If you do not receive this notification within 15 business days from the application deadline date, you should call the U.S. Department of Education Application Control Center at (202) 245-6288.
1.
2.
1.
If your application is not evaluated or not selected for funding, we notify you.
2.
We reference the regulations outlining the terms and conditions of an award in the
3.
4.
a. The percentage of schools served by the grant that have comprehensive, detailed linkage protocols in place; and
b. The percentage of school personnel served by the grant who are trained to make appropriate referrals to mental health services.
These two measures constitute the Department's measures of success for this program. Consequently, applicants for a grant under this program are advised to give careful consideration to these two measures in conceptualizing the approach and evaluation of their proposed project. If funded, applicants will be asked to collect and report data in their performance and final reports about progress toward these measures. The Secretary will also use this information to respond to the evaluation requirements concerning this program established in section 5541(f) of the ESEA. For specific requirements on grantee reporting, please go to
Dana Carr, U.S. Department of Education, 400 Maryland Avenue, SW., Room 3E332, FB6, Washington, DC 20202. Telephone: (202) 260-0823 or by e-mail:
If you use a TDD, call the FRS, toll free, at 1-800-877-8339.
To use PDF you must have Adobe Acrobat Reader, which is available free at this site. If you have questions about using PDF, call the U.S. Government Printing Office (GPO), toll free, at 1-888-293-6498; or in the Washington, DC, area at (202) 512-1530.
The official version of this document is the document published in the
Office of Electricity Delivery and Energy Reliability (DOE).
Notice of orders granting rehearing.
The Department of Energy (DOE) is granting rehearing to all timely-filed requests for rehearing by parties to the proceedings for designating the Mid-Atlantic Area National Electric Transmission Corridor (Docket No. 2007-OE-01) and the Southwest Area National Electric Transmission Corridor (Docket No. 2007-OE-02) for the limited purpose of further consideration of the requests.
Requests for additional information should be directed to David Meyer, DOE Office of Electricity Delivery and Energy Reliability, (202) 586-1411,
On October 5, 2007 (72 FR 56992), DOE issued a National Electric Transmission Congestion Report and Order in which it designated the Mid-Atlantic Area National Interest Electric Transmission Corridor (Docket No. 2007-OE-01) and the Southwest Area National Interest Electric Transmission Corridor (Docket No. 2007-OE-02). DOE received and is considering numerous requests for rehearing. This Notice contains two orders issued in Washington, DC, on December 3, 2007, granting rehearing to all timely-filed requests for rehearing in the above dockets for the limited purpose of further consideration.
The Department of Energy (DOE) issued a National Electric Transmission Congestion Report and Order in the above docket in which it designated the Mid-Atlantic Area National Interest Electric Transmission Corridor (72 FR 56992, Oct. 5, 2007).
Rehearing has been timely requested of DOE's Report and Order. In order to afford additional time for consideration of the matters raised in the rehearing requests, rehearing of DOE's Report and Order is hereby granted to all timely-filed requests for rehearing by parties to the above docket for the limited purpose of further consideration. All rehearing requests filed in the above docket will be addressed in a future order or orders. As provided in Ordering Paragraph E of the Report and Order, DOE will not accept responses to requests for rehearing.
The Department of Energy (DOE) issued a National Electric Transmission Congestion Report and Order in the above docket in which it designated the Southwest Area National Interest Electric Transmission Corridor (72 FR 56992, Oct. 5, 2007).
Rehearing has been timely requested of DOE's Report and Order. In order to afford additional time for consideration of the matters raised in the rehearing requests, rehearing of DOE's Report and Order is hereby granted to all timely-filed requests for rehearing by parties to the above docket for the limited purpose of further consideration. All rehearing requests filed in the above docket will be addressed in a future order or orders. As provided in Ordering Paragraph E of the Report and Order, DOE will not accept responses to requests for rehearing.
Take notice that on November 29, 2007, Allegheny Generating Company tendered for filing a supplement to Exhibit B of its application as requested by the Commission on November 14, 2007.
Any person desiring to intervene or to protest this filing must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211, 385.214). Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Any person wishing to become a party must file a notice of intervention or motion to intervene, as appropriate. Such notices, motions, or protests must be filed on or before the comment date. Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant and all the parties in this proceeding.
The Commission encourages electronic submission of protests and interventions in lieu of paper using the “eFiling” link at
This filing is accessible on-line at
On November 28, 2007, the Commission issued an order that instituted a proceeding in the above-referenced dockets, pursuant to Section 206 of the Federal Power Act (FPA) 16 U.S.C. 824e, to review evidence and to establish a just and reasonable Revenue Sufficiency Guarantee cost allocation methodology for market participants under the Midwest Independent Transmission System Operator, Inc.'s Open Access Transmission and Energy Markets Tariff.
The refund effective date in the above-docketed proceeding, established pursuant to section 206(b) of the FPA, is August 10, 2007.
Take notice that on November 28, 2007, ISO New England Inc. tendered for filing responses to the Commission's deficiency letter issued on November 16, 2007.
Any person desiring to intervene or to protest this filing must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211, 385.214). Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Any person wishing to become a party must file a notice of intervention or motion to intervene, as appropriate. Such notices, motions, or protests must be filed on or before the comment date. Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant and all the parties in this proceeding.
The Commission encourages electronic submission of protests and interventions in lieu of paper using the “eFiling” link at
This filing is accessible on-line at
Take notice that on November 28, 2007, NorthPoint Energy Solutions, Inc. tendered for filing an amendment to their October 22, 2007 amended market-based rate tariff filing.
Any person desiring to intervene or to protest this filing must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211, 385.214). Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Any person wishing to become a party must file a notice of intervention or motion to intervene, as appropriate. Such notices, motions, or protests must be filed on or before the comment date. Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant and all the parties in this proceeding.
The Commission encourages electronic submission of protests and interventions in lieu of paper using the “eFiling” link at
This filing is accessible on-line at
In accordance with the National Environmental Policy Act of 1969 and the Federal Energy Regulatory Commission's regulations, 18 CFR part 380 (Order No. 486, 52 FR 47879) the Office of Energy Projects has prepared an environmental assessment (EA) for an application filed by Duke Energy Carolinas, LLC (licensee) on January 16, 2007, requesting Commission approval of a non-project use of project lands. The licensee requests permission to grant to The Point at Lake Glenville (The Point) a lease for 0.55 acre of project land and permission to install a private cluster dock with a capacity of 10 watercraft at the Westfork Hydroelectric Project (FERC No. 2686). The project is located on the West Fork of the Tuckasegee River near the town of Cashiers in Jackson County, North Carolina. The project does not occupy any federal lands.
The EA evaluates the environmental impacts that would result from approving the licensee's proposal to grant The Point a lease and permission to replace an existing 5-slip private cluster dock with the proposed 10-slip private cluster dock. The EA finds that approval of the application would not constitute a major federal action significantly affecting the quality of the human environment.
A copy of the EA is on file with the Commission and is available for public inspection. The EA may also be viewed on the Commission's Web site at
Any comments should be filed by January 2, 2008 and should be addressed to the Secretary, Federal Energy Regulatory Commission, 888 First Street, NE., Room 1-A, Washington, DC 20426. Please reference the project name and project number (P-2686) on all comments. Comments may be filed electronically via Internet in lieu of paper. The Commission strongly encourages electronic filings. See 18 CFR 385.2001(a)(1)(iii) and the instructions on the Commission's Web site under the “eFiling” link. For further information, contact Chris Yeakel at (202) 502-8132.
Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection:
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All documents (original and eight copies) should be filed with: Kimberly D. Bose, Secretary, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426.
The Commission's Rules of Practice and Procedure require all intervenors filing documents with the Commission to serve a copy of that document on each person whose name appears on the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency. A copy of any motion to intervene must also be served upon each representative of the Applicant specified in the particular application.
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m. Individuals desiring to be included on the Commission's mailing list should so indicate by writing to the Secretary of the Commission.
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o. Any filings must bear in all capital letters the title “COMMENTS”, “PROTEST”, or “MOTION TO INTERVENE”, as applicable, and the Project Number of the particular application to which the filing refers.
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q. Comments, protests and interventions may be filed electronically via the Internet in lieu of paper. See 18 CFR 385.2001(a)(I)(iii) and the instructions on the Commission's Web site at
Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection:
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The Commission's Rules of Practice and Procedure require all intervenors filing documents with the Commission to serve a copy of that document on each person in the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency.
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m. Individuals desiring to be included on the Commission's mailing list should so indicate by writing to the Secretary of the Commission.
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Comments, protests and interventions may be filed electronically via the Internet in lieu of paper; See 18 CFR 385.2001 (a)(1)(iii) and the instructions on the Commission's Web site under “e-filing” link. The Commission strongly encourages electronic filing.
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Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection:
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b.
c.
d.
e.
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j.
The Commission's Rules of Practice and Procedure require all intervenors filing documents with the Commission to serve a copy of that document on each person in the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency.
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m. Individuals desiring to be included on the Commission's mailing list should so indicate by writing to the Secretary of the Commission.
n. Competing Preliminary Permit—Anyone desiring to file a competing application for preliminary permit for a proposed project must submit the competing application itself, or a notice of intent to file such an application, to the Commission on or before the specified comment date for the particular application (see 18 CFR 4.36). Submission of a timely notice of intent allows an interested person to file the competing preliminary permit application no later than 30 days after the specified comment date for the particular application. A competing preliminary permit application must conform with 18 CFR 4.30 and 4.36.
o. Competing Development Application—Any qualified development applicant desiring to file a competing development application must submit to the Commission, on or before a specified comment date for the particular application, either a competing development application or a notice of intent to file such an application. Submission of a timely notice of intent to file a development application allows an interested person to file the competing application no later than 120 days after the specified comment date for the particular application. A competing license application must conform with 18 CFR 4.30 and 4.36.
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Comments, protests and interventions may be filed electronically via the Internet in lieu of paper; See 18 CFR 385.2001 (a)(1)(iii) and the instructions on the Commission's Web site under “e-filing” link. The Commission strongly encourages electronic filing.
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Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
The Commission's Rules of Practice and Procedure require all intervenors filing documents with the Commission to serve a copy of that document on each person in the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency.
k.
l.
m. Individuals desiring to be included on the Commission's mailing list should so indicate by writing to the Secretary of the Commission.
n.
o.
p.
q.
r.
Comments, protests and interventions may be filed electronically via the Internet in lieu of paper; See 18 CFR 385.2001 (a)(1)(iii) and the instructions on the Commission's Web site under “e-filing” link. The Commission strongly encourages electronic filing.
s.
t.
Take notice that the following hydroelectric application has been filed with the Commission and is available for public inspection:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
The Commission's Rules of Practice and Procedure require all intervenors filing documents with the Commission to serve a copy of that document on each person in the official service list for the project. Further, if an intervenor files comments or documents with the Commission relating to the merits of an issue that may affect the responsibilities of a particular resource agency, they must also serve a copy of the document on that resource agency.
k.
l.
m. Individuals desiring to be included on the Commission's mailing list should so indicate by writing to the Secretary of the Commission.
n.
o.
p.
q.
r.
Comments, protests and interventions may be filed electronically via the Internet in lieu of paper; See 18 CFR 385.2001 (a)(1)(iii) and the instructions on the Commission's Web site under “e-filing” link. The Commission strongly encourages electronic filing.
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t.
On November 26, 2007, Commission staff, in response to the filing of a notice of study dispute by the New York State Department of Environmental Conservation on November 8, 2007, convened two three-person Dispute Resolution Panels pursuant to 18 CFR 5.14(d).
The Panels will hold a two-session technical conference at the times and place noted below. The morning session (Session 1) will address study disputes regarding impacts related to floodplain, ice management, municipal combined sewer overflows and infrastructure. The afternoon session (Session 2) will address study disputes regarding sampling for sturgeon movement and spawning and the Phase II ASTM environmental site assessment. The focus of the technical session is for the disputing agency, applicant, and Commission to provide the Panels with additional information necessary to evaluate the disputed studies. All local, state, and federal agencies, Indian tribes, and other interested parties are invited to attend the meeting as observers. The Panels may also request information or clarification on written submissions as necessary to understand the matters in dispute. The Panels will limit all input that it receives to the specific studies or information in dispute and will focus on the applicability of such studies or information to the study criteria stipulated in 18 CFR 5.9(b). If the number of participants wishing to speak creates time constraints, the Panels may, at their discretion, limit the speaking time for each participant.
Date: December 12, 2007.
Session 1: 9 a.m.-11:30 a.m. (EST).
Session 2: 1 p.m.-4 p.m.
Place: Doubletree Hotel Syracuse, 6301 State Route 298, East Syracuse, New York 13057.
Phone: 315-432-0200.
As announced in the “Notice of Technical Conference” issued on November 2, 2007, a technical conference will be held on Tuesday, December 11, 2007 from 9:30 a.m. to approximately 4:30 p.m. (EST) (changed from the starting and closing times listed in the previous notice), in the Commission Meeting Room of the Federal Energy Regulatory Commission (FERC) at 888 First Street, NE., Washington, DC 20426. Commissioners will be attending this conference.
The Commission issued Order No. 2003 to standardize the agreements and procedures related to the interconnection of large generating facilities.
The purpose of this conference is to discuss possible methods to address the current challenges of queue management while still honoring the Order No. 2003 goals described above. Panelists should identify the steps and timeframes necessary to implement specific proposals. The agenda for the conference is attached.
Transcripts of the conference will be immediately available from Ace Reporting Company (202-347-3700 or 1-800-336-6646) for a fee. Additionally, a free webcast of this event will be available through
FERC conferences are accessible under section 508 of the Rehabilitation Act of 1973. For accessibility accommodations please send an e-mail to
For further information about the conference, please contact: Sarah McKinley, Office of External Affairs, (202) 502-8368,
The Federal Energy Regulatory Commission hereby gives notice that members of its staff may attend the meeting noted below. Their attendance is part of the Commission's ongoing outreach efforts.
December 11, 2007 (9 a.m.-3 p.m. CST), Crowne Plaza Houston North Greenspoint, 425 N. Sam Houston Pkwy East, Houston, TX 77060, 281-445-9000.
The discussions may address matters at issue in the following proceedings:
These meetings are open to the public.
For more information, contact Amy Demetry, Office of Energy Market Regulation, Federal Energy Regulatory Commission at (202) 502-6090 or
Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:
Any person desiring to intervene or to protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211 and 385.214) on or before 5 p.m. Eastern time on the specified comment date. It is not necessary to separately intervene again in a subdocket related to a compliance filing if you have previously intervened in the same docket. Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Anyone filing a motion to intervene or protest must serve a copy of that document on the Applicant. In reference to filings initiating a new proceeding, interventions or protests submitted on or before the comment deadline need not be served on persons other than the Applicant.
The Commission encourages electronic submission of protests and interventions in lieu of paper, using the FERC Online links at
Persons unable to file electronically should submit an original and 14 copies of the intervention or protest to the Federal Energy Regulatory Commission, 888 First St., NE., Washington, DC 20426.
The filings in the above proceedings are accessible in the Commission's eLibrary system by clicking on the appropriate link in the above list. They are also available for review in the Commission's Public Reference Room in Washington, DC. There is an eSubscription link on the Web site that enables subscribers to receive e-mail notification when a document is added to a subscribed dockets(s). For assistance with any FERC Online service, please e-mail
The Federal Energy Regulatory Commission hereby provides notice of the membership of its Performance Review Board (PRB) for the Commission's Senior Executive Service (SES) members. The function of this board is to make recommendations relating to the performance of senior executives in the Commission. This action is undertaken in accordance with Title 5, U.S.C., Section 4314(c)(4). The Commission's PRB will add the following member:
Environmental Protection Agency (EPA).
Notice.
In compliance with the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), this action announces that EPA is planning to submit a request for a new Information Collection Request (ICR) to the Office of Management and Budget (OMB). Before submitting the ICR to OMB for review and approval, EPA is soliciting comments on specific aspects of the proposed information collection as described below.
Comments must be submitted on or before February 5, 2008.
Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2002-0058, by one of the following methods:
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Jim Eddinger, Energy Strategies Group, Sector Policies and Program Division, (D243-01), Environmental Protection Agency, Research Triangle Park, North Carolina 27711; telephone number: (919) 541-5426; fax number: (919) 541-5450; e-mail address:
EPA has established a public docket for this ICR under Docket ID No. EPA-HQ-OAR-2002-0058, which is available for online viewing at
Use
Pursuant to section 3506(c)(2)(A) of the PRA, EPA specifically solicits comments and information to enable it to:
(i) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Agency, including whether the information will have practical utility;
(ii) Evaluate the accuracy of the Agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
(iii) Enhance the quality, utility, and clarity of the information to be collected; and
(iv) Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses. In particular, EPA is requesting comments from very small businesses (those that employ less than 25) on examples of specific additional efforts that EPA could make to reduce the paperwork burden for very small businesses affected by this collection.
You may find the following suggestions helpful for preparing your comments.
1. Explain your views as clearly as possible and provide specific examples.
2. Describe any assumptions that you used.
3. Provide copies of any technical information and/or data you used that support your views.
4. If you estimate potential burden or costs, explain how you arrived at the estimate that you provide.
5. Offer alternative ways to improve the collection activity.
6. Make sure to submit your comments by the deadline identified under
7. To ensure proper receipt by EPA, be sure to identify the docket ID number assigned to this action in the subject line on the first page of your response. You may also provide the name, date, and
The second component will consist of requiring, if deemed necessary, again through the issuance of a letter pursuant to the authority of section 114 of the CAA, the owners/operators of up to a total of 350 boilers or process heaters selected at random to conduct in accordance with an EPA-approved protocol stack testing.
The EPA estimates the cost of the electronic survey component of the information collection will be 95,832 hours and $7,685,102. The total annual reporting and recordkeeping burden for the stack testing component of the data gathering effort is estimated to be no more than 29,584 hours and $11,712,769.
Industrial, commercial, and institutional boilers and process heaters were listed as a major source category of HAP on July 16, 1992 (57 FR 31576). Section 112(c)(2) of the CAA requires that we establish National Emission Standards for Hazardous Air Pollutants (NESHAP) for control of HAP from both existing and new major sources, based upon the criteria set out in the CAA section 112(d). The CAA requires the NESHAP to reflect the maximum degree of reduction in emissions of HAP that is achievable, taking into consideration the cost of achieving the emission reduction, any non-air quality health and environmental impacts, and energy requirements. This level of control is commonly referred to as the maximum achievable control technology (MACT). The minimum control level allowed for NESHAP (the minimum level of stringency for MACT) is the “MACT floor,” as defined under section 112(d)(3) of the CAA. The MACT floor for existing sources is the emission limitation achieved by the average of the best-performing 12 percent of existing sources for categories and subcategories. For new sources, the MACT floor cannot be less stringent than the emission control achieved in practice by the best-controlled similar source.
The NESHAP for boilers and process heaters were promulgated at 40 CFR part 63, subpart DDDDD, on September 2004 (see 69 FR 55218), and vacated by the Courts on June 8, 2007. The vacature requires the Agency to revise the standards and the associated MACT floors based on new estimates of potentially affected units.
The previous rulemaking was based upon data gathered for the Industrial Combustion Coordinated Rulemaking, complimented by additional survey data received from non-fossil boiler and process heaters. These data sources are over 10 years old. When the Agency recently compared these data to facilities submitting initial notifications to comply with the vacated standard, a large disparity was identified in the number of potentially affected units at major sources of HAP. Since the last boiler and process heater data gathering effort, many sources have shut down, others have selected to operate with a limit on their HAP emissions in order to avoid being subject to the Boiler and Process Heater NESHAP, and some units have switched out older solid fuel units for newer equipment due to increased insurance and maintenance costs. Therefore, the Agency has concluded that obtaining updated information will be crucial to informing its decision on the revised NESHAP for boilers and process heaters.
The information in both components of this ICR will be collected under authority of section 114 of the CAA. Section 114(a) states, in pertinent part:
For the purpose * * * (iii) carrying out any provision of this Chapter * * * (1) the Administrator may require any person who owns or operates any emission source * * * to- * * * (D) sample such emissions (in accordance with such procedures or methods, at such locations, at such intervals, during such periods and in such manner as the Administrator shall prescribe); (E) keep records on control equipment parameters, production variables or other indirect data when direct monitoring of emissions is impractical * * * (G) provide such other information as the Administrator may reasonably require * * *
The data collected will be used to revise the population of potentially affected boilers and process heaters, and update existing emission test data and fuel analysis information. These data will be used by the Agency to develop the revised NESHAP for boilers and process heaters (and potentially incinerators) under sections 112 and 129 of the CAA. Specifically, the data will respond in part to the two research needs, providing the Agency with updated information on the number of potentially affected units, available emission test data and fuel analysis data to address variability. For a subset of units that may become subject to CAA section 129, and thus be required to conduct stack tests, the data will be used to complete emission data gaps. All data collected will be added to existing emission test databases for boilers, process heaters, and when appropriate, incinerators; it will also be used to further evaluate the HAP emissions from these sources.
This collection of information is mandatory under section 114 of the CAA (42 U.S.C 7414). All information submitted to EPA pursuant to this ICR for which a claim of confidentiality is made is safeguarded according to Agency policies in 40 CFR part 2, subpart B. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. OMB control numbers for EPA's regulations in 40 CFR are listed in 40 CFR part 9.
The EPA would like to solicit comments to:
(i) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Agency, including whether the information will have practical utility;
(ii) Evaluate the accuracy of the Agency's estimate of the burden of the proposed collection of information, including the methodology and assumptions used;
(iii) Enhance the quality, utility, and clarity of the information to be collected; and
(iv) Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.
The ICR provides a detailed explanation of the Agency's estimate, which is only briefly summarized here.
EPA will consider the comments received and amend the ICR as appropriate. The final ICR package will then be submitted to OMB for review and approval pursuant to 5 CFR 1320.12. At that time, EPA will issue another
Availability of EPA comments prepared pursuant to the Environmental Review Process (ERP), under section 309 of the Clean Air Act and section 102(2)(c) of the National Environmental Policy Act as amended. Requests for copies of EPA comments can be directed to the Office of Federal Activities at 202-564-7167. An explanation of the ratings assigned to draft environmental impact statements (EISs) was published in FR dated April 6, 2007 (72 FR 17156).
The Federal Communications Commission, as part of its continuing effort to reduce paperwork burden invites the general public and other Federal agencies to take this opportunity to comment on the following information collection(s), as required by the Paperwork Reduction Act of 1995, Public Law 104-13. An agency may not conduct or sponsor a collection of information unless it displays a currently valid control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act (PRA) that does not display a valid control number. Comments are requested concerning (a) whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission's burden estimate; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on the respondents, including the use of automated collection techniques or other forms of information technology.
Written comments should be submitted on or before January 7, 2008. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this notice, you should advise the contacts listed below as soon as possible.
Direct all PRA comments to Nicholas A. Fraser, Office of Management and Budget, via e-mail to
For additional information about the information collection(s), contact Leslie F. Smith via e-mail at
The Commission has requested approval of this information collection under the emergency processing provisions of the PRA by January 22, 2008.
The companies listed in this notice have applied to the Board for approval, pursuant to the Bank Holding Company Act of 1956 (12 U.S.C. 1841
The applications listed below, as well as other related filings required by the Board, are available for immediate inspection at the Federal Reserve Bank indicated. The application also will be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing on the standards enumerated in the BHC Act (12 U.S.C. 1842(c)). If the proposal also involves the acquisition of a nonbanking company, the review also includes whether the acquisition of the nonbanking company complies with the standards in section 4 of the BHC Act (12 U.S.C. 1843). Unless otherwise noted, nonbanking activities will be conducted throughout the United States. Additional information on all bank holding companies may be obtained from the National Information Center website at
Unless otherwise noted, comments regarding each of these applications must be received at the Reserve Bank indicated or the offices of the Board of Governors not later than January 3, 2008.
Board of Governors of the Federal Reserve System, December 4, 2007.
Centers for Medicare & Medicaid Services, HHS.
In compliance with the requirement of section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995, the Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services, is publishing the following summary of proposed collections for public comment. Interested persons are invited to send comments regarding this burden estimate or any other aspect of this collection of information, including any of the following subjects: (1) The necessity and utility of the proposed information collection for the proper performance of the Agency's function; (2) the accuracy of the estimated burden; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) the use of automated collection techniques or other forms of information technology to minimize the information collection burden.
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To obtain copies of the supporting statement and any related forms for the proposed paperwork collections referenced above, access CMS Web Site address at
To be assured consideration, comments and recommendations for the proposed information collections must be received by the OMB desk officer at the address below, no later than 5 p.m. on
OMB Human Resources and Housing Branch, Attention: Katherine Astrich, New Executive Office Building, Room 10235, Washington, DC 20503, Fax Number: (202) 395-6974.
In compliance with the requirements of section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995, the Administration for Children and Families is soliciting public comment on the specific aspects of the information collection described above. Copies of the proposed collection of information can be obtained and comments may be forwarded by writing to the Administration for Children nd Families, Office of Administration, Office of Information Services, 370 L'Enfant Promenade, SW., Washington, DC 20447,
The Department specifically requests comments on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden of the proposed collection of information; (c) the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted within 60 days of this publication.
In compliance with the requirements of section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995, the Administration for Children and Families is soliciting public comment on the specific aspects of the information collection described above. Copies of the proposed collection of information can be obtained and comments may be forwarded by writing to the Administration for Children and Families, Office of Information Services, 370 L'Enfant Promenade, SW., Washington, DC 20447,
The Department specifically requests comments on: (a) Whether the proposed
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. Appendix 2), notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which constitute a clearly unwarranted invasion of personal privacy.
Office of the Assistant Secretary for Housing, HUD.
Notice.
The proposed information collection requirement described below will be submitted to the Office of Management and Budget (OMB) for review, as required by the Paperwork Reduction Act. The Department is soliciting public comments on the subject proposal.
Interested persons are invited to submit comments regarding this proposal. Comments should refer to the proposal by name and/or OMB Control Number and should be sent to: Lillian Deitzer, Reports Management Officer, Department of Housing and Urban Development, 451 7th Street, SW., L'Enfant Building, Room 8202, Washington, DC 20410, telephone (202) 708-5221 (this is not a toll-free number) for copies of the proposed forms and other available information.
Veronica Lewis, Field Asset Management Division, Department of Housing and Urban Development, 451 7th Street, SW., Washington, DC 20410, telephone number (202) 402-2597 (this is not a toll-free number).
The Department is submitting the proposed information collection to OMB for review, as required by the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35, as amended).
This Notice is soliciting comments from members of the public and affected agencies concerning the proposed collection of information to: (1) Evaluate whether the proposed collection is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information; (3) Enhance the quality, utility, and clarity of the information to be collected; and (4) Minimize the burden of the collection of information on those who are to respond; including the use of appropriate automated collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.
This Notice also lists the following information:
The Paperwork Reduction Act of 1995, 44 U.S.C., Chapter 35, as amended.
Office of the Assistant Secretary for Housing, HUD.
Notice.
The proposed information collection requirement described below will be submitted to the Office of Management and Budget (OMB) for review, as required by the Paperwork Reduction Act. The Department is soliciting public comments on the subject proposal.
Interested persons are invited to submit comments regarding this proposal. Comments should refer to the proposal by name and/or OMB Control Number and should be sent to: Lillian Deitzer, Reports Management Officer, Department of Housing and Urban Development, 451 7th Street, SW., L'Enfant Building, Room 8202, Washington, DC 20410, telephone (202) 708-5221 (this is not a toll-free number) for copies of the proposed forms and other available information.
Kimberly Munson, Office of Asset Management, Policy and Participation Standards Division, Department of Housing and Urban Development, 451 7th Street, SW., Washington, DC 20410, telephone number (202) 708-1320 (this is not a toll-free number).
The Department is submitting the proposed information collection to OMB for review, as required by the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35, as amended).
This Notice is soliciting comments from members of the public and affected agencies concerning the proposed collection of information to: (1) Evaluate whether the proposed collection is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (2) evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information; (3) enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of the collection of information on those who are to respond; including the use of appropriate automated collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.
This Notice also lists the following information:
The Paperwork Reduction Act of 1995, 44 U.S.C., Chapter 35, as amended.
Office of the Assistant Secretary for Community Planning and Development, HUD.
Notice.
This Notice identifies unutilized, underutilized, excess, and surplus Federal property reviewed by HUD for suitability for possible use to assist the homeless.
Kathy Ezzell, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 7266, Washington, DC 20410; telephone (202) 708-1234; TTY number for the hearing- and speech-impaired (202) 708-2565 (these telephone numbers are not toll-free), or call the toll-free Title V information line at 800-927-7588.
In accordance with 24 CFR part 581 and section 501 of the Stewart B. McKinney Homeless Assistance Act (42 U.S.C. 11411), as amended, HUD is publishing this Notice to identify Federal buildings and other real property that HUD has reviewed for suitability for use to assist the homeless. The properties were reviewed using information provided to HUD by Federal landholding agencies regarding unutilized and underutilized buildings and real property controlled by such agencies or by GSA regarding its inventory of excess or surplus Federal property. This Notice is also published in order to comply with the December 12, 1988 Court Order in
Properties reviewed are listed in this Notice according to the following categories: Suitable/available, suitable/unavailable, suitable/to be excess, and unsuitable. The properties listed in the three suitable categories have been reviewed by the landholding agencies, and each agency has transmitted to HUD: (1) Its intention to make the property available for use to assist the homeless, (2) its intention to declare the property excess to the agency's needs, or (3) a statement of the reasons that the property cannot be declared excess or made available for use as facilities to assist the homeless.
Properties listed as suitable/available will be available exclusively for homeless use for a period of 60 days from the date of this Notice. Where property is described as for “off-site use only” recipients of the property will be required to relocate the building to their own site at their own expense. Homeless assistance providers interested in any such property should send a written expression of interest to HHS, addressed to John Hicks, Division of Property Management, Program Support Center, HHS, Room 5B-17, 5600 Fishers Lane, Rockville, MD 20857; (301) 443-2265. (This is not a toll-free number.) HHS will mail to the interested provider an application packet, which will include instructions for completing the application. In order to maximize the opportunity to utilize a suitable property, providers should submit their written expressions of interest as soon as possible. For complete details concerning the processing of applications, the reader is encouraged to refer to the interim rule governing this program, 24 CFR part 581.
For properties listed as suitable/to be excess, that property may, if subsequently accepted as excess by GSA, be made available for use by the homeless in accordance with applicable law, subject to screening for other Federal use. At the appropriate time, HUD will publish the property in a
For properties listed as suitable/unavailable, the landholding agency has decided that the property cannot be declared excess or made available for use to assist the homeless, and the property will not be available.
Properties listed as unsuitable will not be made available for any other purpose for 20 days from the date of this Notice. Homeless assistance providers interested in a review by HUD of the determination of unsuitability should call the toll free information line at 1-800-927-7588 for detailed instructions or write a letter to Mark Johnston at the address listed at the beginning of this Notice. Included in the request for review should be the property address (including zip code), the date of publication in the
For more information regarding particular properties identified in this Notice (
Fish and Wildlife Service, Interior.
Notice of receipt of permit applications; request for comment.
We invite the public to comment on the following application to conduct certain activities with endangered species.
Comments on this permit application must be received on or before January 7, 2008.
Written data or comments should be submitted to the U.S. Fish and Wildlife Service, Chief, Endangered Species, Ecological Services, 911 NE. 11th Avenue, Portland, Oregon 97232-4181 (telephone: 503-231-2063; fax: 503-231-6243). Please refer to the permit number for the application when submitting comments. All comments received, including names and addresses, will become part of the official administrative record and may be made available to the public.
Grant Canterbury, Fish and Wildlife Biologist, at the above Portland address (telephone: 503-231-2063; fax: 503-231-6243).
The following applicant has applied for a permit to conduct certain activities with endangered species pursuant to section 10(a)(1)(A) of the Endangered Species Act (16 U.S.C. 1531 et seq.). The U.S. Fish and Wildlife Service (“we”) solicits review and comment from local, State, and Federal agencies, and the public on the following permit request.
The applicant requests a permit to purchase, in interstate commerce, two female and two male captive bred Hawaiian (=nene) geese (
We solicit public review and comment on this recovery permit application. Before including your address, phone number, e-mail address, or other personal identifying information in your comment, you should be aware that your entire comment—including your personal identifying information—may be made publicly available at any time. While you can ask us in your comment to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
Comments and materials received will be available for public inspection, by appointment, during normal business hours at the above address.
Office of Indian Energy and Economic Development, Interior.
Notice.
This notice announces the Information Collection Request regarding the Job Placement & Training Application, OMB No. 1076-0062, has been submitted to the Office of Management and Budget (OMB) for reinstatement. The collection expired during the renewal process.
Submit your comments and suggestions on or before January 7, 2008.
Written comments should be sent directly to the Office of Management and Budget, Office of Information and Regulatory Affairs,
Send a copy of your comments to Lynn Forcia, Chief, Division of Workforce Development, Office of Indian Energy and Economic Development, 1951 Constitution Avenue, NW., Mailstop 20 SIB, Washington, DC 20245.
Copies of the information collection form may be obtained by contacting Lynn Forcia at 202-219-5270. (This is not a toll free number.)
The information collection process is necessary to assess work history and training needs of adult Indians who reside on or near Indian reservations, and who desire to obtain reasonable and satisfactory employment. The information collection document provides data necessary to administer the Job Placement & Training program. The Department is authorized to undertake a program of Job Placement which may include financial assistance, vocational training (including apprenticeships and on-the-job training), counseling, guidance, and related services for any recognized vocation. The program is available to Indians who are not less than 18 years old and who reside on or near an Indian reservation (and in Alaska). Public Law 84-959 and Public Law 88-230 authorize the BIA to enter into contracts or agreements with Federal, State, and local government agencies or associations with non-apprenticeship programs, apprenticeship programs, or on-the-job training that leads to skilled employment. The same application form is used for both 25 CFR Parts 26 (Employment Assistance for Adult Indians) and 27 (Vocational Training for Adult Indians). Information of a confidential nature is protected by the Privacy Act. A request for comments on this information collection was published in the
Comments are invited on (a) whether the information collection is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency's estimate of the burden (hours and cost) of the collection of information, including the validity of the methodology and assumptions used; (c) ways to enhance the quality, utility and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of the information on the respondents, including through the use of automated collection techniques or other forms of information technology.
The Office of Management and Budget has up to 60 days to approve or disapprove the information collection form, but may respond after 30 days; therefore, comments submitted in response to this notice should be submitted to OMB within 30 days in order to assure their maximum consideration.
Please note that all comments are available for public review during regular office hours. If you wish to have your name and/or address withheld, you must state this prominently at the beginning of your comments. We will honor your request to the extent allowed by law. All comments from businesses or representatives of businesses will be open for public review.
Bureau of Land Management, Folsom Field Office, California, Interior.
Emergency closure of public lands in Yuba County, California.
Notice is hereby given that two parcels of public land are temporarily closed to all motorized vehicle use. The purpose of this emergency order is to protect federally-listed anadromous fish species, specifically Central Valley fall-run chinook salmon (federal candidate species), Central Valley spring-run chinook salmon (federally threatened), and Central Valley steelhead (federally threatened).
The closed area, approximately 160 acres, is described as follows: All public lands in T16N, R5E, Section 22 and lands in T16N, R5E, Section 27, Lots 7 and 8, and the riverbed between the above stated lands.
Closure signs will be posted at main entry points to these areas. Maps of the closure area may be obtained from the Folsom Field Office, 63 Natoma Street, Folsom, CA 95630. Phone: (916) 985-4474.
The closure will take effect immediately, and will remain in effect for less than six months until the Sierra Resource Management Plan and supplemental rules relevant to this closure are finalized.
Bill Haigh, Bureau of Land Management, 63 Natoma Street, Folsom, CA 95630. Phone: (916) 985-4474.
BLM is implementing this action on 160 acres of public land in Yuba County, California. BLM has observed motorized vehicles entering the river over salmon and steelhead spawning redds. Salmon and steelhead spawning in this reach of the river are all listed in some capacity by the U.S. Fish and Wildlife Service. This reach of the river is also designated as critical habitat for these species by the U.S. Fish and Wildlife Service. Motorized use is adversely impacting spawning habitat and redds for these anadromous fish species. Consequently, this area is being closed to motorized use.
Bureau of Land Management, Interior.
Notice of Availability.
In accordance with the National Environmental Policy Act of 1969 (NEPA, 42 U.S.C. 4321
BLM Planning Regulations (43 CFR 1610.5-2) state that any person who participated in the planning process, and has an interest that is or may be adversely affected, may protest the BLM's approval or amendment of an RMP. That person must file a protest within 30 days of the date the Environmental Protection Agency publishes its Notice of Availability in the
Chuck Denton, BLM Anchorage Field Office, 6881 Abbott Loop Road, Anchorage, AK 99507, (907) 267-1246 or (800) 478-1263.
The Bay planning area includes 1,927,083 acres of BLM-administered public lands and resources in the Bristol Bay and Goodnews Bay areas of southwest Alaska. The Bay Proposed RMP/Final EIS focuses on the principles of multiple use and sustained yield as prescribed by Section 202 of FLPMA. The Proposed RMP/Final EIS considers and analyzes four alternatives, including a No Action and a Preferred Alternative. The alternatives provide for an array of variable levels of commodity production and resource protection.
The alternatives were developed based on public scoping and participation, as required by the BLM's Land Use Planning Handbook (H-1601-1). The public involvement and collaboration process included nine public scoping meetings, six public meetings on the Draft RMP/EIS, and meetings with other interested parties. The BLM consulted with Alaska Native tribes; federal, state, and local government agencies; elected community officials; and the BLM's Alaska Resource Advisory Council. Involvement with the State of Alaska throughout the planning process was achieved through a joint BLM/State position, which provided a liaison between the State and the BLM.
Primary issues addressed through this planning process include: (1) Natural resources protection, primarily water and fisheries resources, due to the proposed lifting of land withdrawals and possible locatable mining exploration and development on BLM- and State of Alaska-managed lands; (2) social and economic conditions, including subsistence resources; and (3) ACEC (Area of Critical Environmental Concern) determination.
In addition to these issues, the Bay Proposed RMP/Final EIS addresses management of various program areas such as vegetation, fish and wildlife habitat, fire management, cultural resources, visual resources, forest resources, and realty. The Proposed RMP/Final EIS also resulted in development of required operating procedures (ROPs), which are requirements, procedures, management practices, or design features the BLM
As required by 43 CFR 1610.7-2, areas with potential for designation as ACECs were considered during the Bay planning process. The preferred alternative recommends the designation of one ACEC, known as the Carter Spit ACEC. Final acreage for the proposed 36,220-acre Carter Spit ACEC will depend on the result of land conveyance to the State of Alaska and Native corporations. This ACEC is proposed to provide additional protections for Steller's eiders (
• Limited OHV (off-highway vehicle) designation.
• Avoidance Area for rights-of-ways.
• Open to fluid mineral leasing subject to special stipulations.
• Open to locatable mineral entry subject to required operating procedures.
• Closed to salable mineral activities.
All comments received on the plan were analyzed and evaluated. Substantive comments and the BLM's responses to those comments can be found in the appendices of the Proposed RMP/Final EIS. Comments on the Draft RMP/EIS received from the public and BLM review comments were incorporated into the Proposed RMP/Final EIS. Public comments resulted in changes to the preferred alternative through the addition of clarifying text and additional analysis of impacts, and contributed to the adjustment of the boundary of the proposed Carter Spit ACEC. A summary of these changes follows the Executive Summary of the Proposed RMP/Final EIS.
Copies of the Bay Proposed RMP/Final EIS have been sent to affected federal, state, and local government agencies and to interested parties. The document is available for public inspection at the BLM Anchorage Field Office, 6881 Abbott Loop Road, Anchorage, AK, during normal business hours from 7:30 a.m. to 4 p.m., Monday through Friday, except holidays. Interested persons may also view the document on the Internet at
Before including your address, phone number, e-mail address, or other personal identifying information in your protest, you should be aware that your entire protest—including your personal identifying information—may be made publicly available at any time. While you can ask us to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
This document was received at the Office of the Federal Register on Monday, December 3, 2007.
Bureau of Land Management, Interior.
Notice of availability.
In accordance with the National Environmental Policy Act of 1969 (NEPA, 42 U.S.C. 4321
BLM Planning Regulations set forth the provisions applicable to protests (43 CFR 1610.5-2). A person who meets the conditions as described in the regulations cited above, and who wishes to file a protest, must file said protest within 30 days of the date this notice is published in the
A copy of the Proposed RMP/Final EIS has been sent to affected Federal, State and local government agencies and interested parties. The document will be available electronically at the following Eastern San Diego County RMP Web site:
• Bureau of Land Management, California State Office, 2800 Cottage Way, Suite W-1834, Sacramento, CA 95825.
• Bureau of Land Management, El Centro Field Office, 1661 S. 4
Erin Dreyfuss, Eastern San Diego County RMP Team Leader, at (760) 337-4400, Bureau of Land Management, 1661 S. 4
The planning area for the Eastern San Diego County RMP is the El Centro Field Office's area of management responsibility. A total of approximately 103,000 acres of public lands are administered by the BLM in the planning area. The decisions in the RMP will only apply to BLM-administered lands and mineral estate in the planning area. The Eastern San Diego County Proposed RMP and Final EIS have been developed through collaborative planning and consider four alternatives. Primary issues include: renewable energy, sensitive natural and cultural resources, livestock grazing, energy and mineral development, visual resources,
Comments on the Eastern San Diego County Draft RMP/EIS received from the public and internal BLM review comments were incorporated into the Proposed RMP. Public comments resulted in corrections, clarifying text, and the addition of new data used in the analysis of impacts. The Proposed Eastern San Diego County RMP would provide comprehensive, long-range decisions for the use and management of resources in the planning area administered by the BLM and focus on the principles of multiple use and sustained yield.
As noted above, instructions for filing a protest with the Director of the BLM regarding the Proposed RMP and Final EIS are described in 43 CFR 1610.5-2. E-mailed and faxed protests will not be accepted as valid protests unless the protesting party also provides the original letter by regular or overnight mail postmarked by the close of the protest period. Under these conditions, BLM will consider the e-mailed or faxed protest as an advance copy and it will receive full consideration. If you wish to provide BLM with such advance notification, please direct faxed protests to the attention of the BLM protest coordinator at (202) 452-5112, and e-mails to
All protests, including the follow-up letter (if e-mailing or faxing) must be in writing and mailed to one of the following addresses:
Before including your address, phone number, e-mail address, or other personal identifying information in your protest, you should be aware that your entire protest—including your personal identifying information—may be made publicly available at any time. While you can ask us in your protest to withhold your personal identifying information from public review, we cannot guarantee that we will be able to do so.
U.S. International Trade Commission.
Notice.
Notice is hereby given that the U.S. International Trade Commission has determined not to review an initial determination (“ID”) of the presiding administrative law judge (“ALJ”) (Order No. 19) in the above-captioned investigation terminating this investigation, as to the last remaining respondents, Hitachi Koki USA (“Hitachi”) and CDW Corp. (“CDW”).
Paul M. Bartkowski, Esq., Office of the General Counsel, U.S. International Trade Commission, 500 E Street, SW., Washington, DC 20436, telephone (202) 708-5432. Copies of non-confidential documents filed in connection with this investigation are or will be available for inspection during official business hours (8:45 a.m. to 5:15 p.m.) in the Office of the Secretary, U.S. International Trade Commission, 500 E Street, SW., Washington, DC 20436, telephone (202) 205-2000. General information concerning the Commission may also be obtained by accessing its Internet server at
This investigation was instituted on April 27, 2007, based on a complaint filed by 3M Company and 3M Innovative Properties Company of St. Paul, Minnesota (collectively “3M”). 72 FR 21,050 (April 27, 2006). The complaint, as amended and supplemented, alleges violations of section 337 in the importation into the United States, the sale for importation, and the sale within the United States after importation of certain rechargeable lithium-ion batteries, components thereof, and products containing the same by reason of infringement of one or more of claims 1, 2, 13, and 15-19 of U.S. Patent No. 6,964,828 (“the ‘828 patent”) and claims 10, 15, 16, and 22 of U.S. Patent No. 7,078,128 (“the ‘128 patent”). The amended complaint also alleges that a domestic industry exists with regard to the ‘828 and ‘128 patents under 19 U.S.C. 1337 subsections (a)(2) and (a)(3). The amended complaint names Sony Corporation and Sony Electronics, Inc. (collectively, “Sony”); Lenovo Group Ltd. (Hong Kong) and Lenovo Inc. (USA) (collectively, “Lenovo”); CDW; Batteries Com, LLC (“Batteries Com”); Hitachi; Matsushita Industrial Electric Co., Ltd. (“Matsushita”); Panasonic Corporation of North America (“Panasonic”); Total Micro Technologies Inc. (“Total Micro”); and Sanyo Electric Co., Ltd. (“Sanyo”) as the proposed respondents. The amended complaint requests that the Commission institute an investigation pursuant to section 337 and, after the investigation, issue a permanent exclusion order and cease and desist orders. Subsequently, respondents Sony, Lenovo, Batteries Com, Matsushita, Panasonic, Total Micro, and Sanyo were terminated from the investigation. None of those determinations were reviewed by the Commission.
On November 9, 2007, the ALJ issued the subject ID terminating this investigation as to Hitachi and CDW pursuant to Commission rule 210.21 on the basis of settlement agreements with the suppliers of the batteries at issue. No petitions for review of the ID were filed. The Commission has determined not to review the ID.
3M filed a supplement to its motion pursuant to Commission rule 210.16 that it does not seek a general exclusion order. 3M also filed a declaration stating
The authority for the Commission's determination is contained in section 337 of the Tariff Act of 1930, as amended (19 U.S.C. 1337), and in section 210.21, 210.41, and 210.42 of the Commission's Rules of Practice and Procedure (19 CFR 210.21, 210.41, 210.42).
By order of the Commission.
U.S. International Trade Commission.
Notice.
Notice is hereby given that the U.S. International Trade Commission has determined not to review an initial determination (“ID”) of the presiding administrative law judge (“ALJ”) (Order No. 18) in the above-captioned investigation terminating this investigation, as to respondent Sanyo Electric Co., Ltd. (“Sanyo”).
Paul M. Bartkowski, Esq., Office of the General Counsel, U.S. International Trade Commission, 500 E Street, SW., Washington, DC 20436, telephone (202) 708-5432. Copies of non-confidential documents filed in connection with this investigation are or will be available for inspection during official business hours (8:45 a.m. to 5:15 p.m.) in the Office of the Secretary, U.S. International Trade Commission, 500 E Street, SW., Washington, DC 20436, telephone (202) 205-2000. General information concerning the Commission may also be obtained by accessing its Internet server at
This investigation was instituted on April 27, 2007, based on a complaint filed by 3M Company and 3M Innovative Properties Company of St. Paul, Minnesota (collectively “3M”). 72 FR 21,050 (April 27, 2006). The complaint, as amended and supplemented, alleges violations of section 337 in the importation into the United States, the sale for importation, and the sale within the United States after importation of certain rechargeable lithium-ion batteries, components thereof, and products containing the same by reason of infringement of one or more of claims 1, 2, 13, and 15-19 of U.S. Patent No. 6,964,828 (“the ‘828 patent”) and claims 10, 15, 16, and 22 of U.S. Patent No. 7,078,128 (“the ‘128 patent”). The amended complaint also alleges that a domestic industry exists with regard to the ‘828 and ‘128 patents under 19 U.S.C. § 1337 subsections (a)(2) and (a)(3). The amended complaint names Sony Corporation and Sony Electronics, Inc. (collectively, “Sony”); Lenovo Group Ltd. (Hong Kong) and Lenovo Group Inc. (USA) (collectively, “Lenovo”); CDW Corporation; Batteries Com, LLC; Hitachi Koki USA, Ltd.; Matsushita Industrial Electric Co., Ltd.; Panasonic Corporation of North America; Total Micro Technologies Inc. (“Total Micro”); and Sanyo Electric Co., Ltd. as the proposed respondents. Subsequently, the target date of November 28, 2008 (19 months) was set and, later, respondents Matsushita Industrial Electric Co., Ltd., Panasonic Corporation of North America, Batteries Com, Lenovo, Total Micro, and Sony were terminated from the investigation on the basis of settlement agreements. None of those determinations were reviewed by the Commission.
On November 9, 2007, the ALJ issued the subject ID terminating this investigation as to Sanyo pursuant to Commission rule 210.21 based on a settlement agreement between Sanyo and 3M. No petitions for review of the ID were filed. The Commission has determined not to review the ID.
The authority for the Commission's determination is contained in section 337 of the Tariff Act of 1930, as amended (19 U.S.C. 1337), and in section 210.21, 210.42 of the Commission's Rules of Practice and Procedure (19 CFR 210.21, 210.42).
By order of the Commission.
Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), Department of Justice.
Notice of list of explosive materials.
Pursuant to 18 U.S.C. 841(d) and 27 CFR 555.23, the Department must publish and revise at least annually in the
The list becomes effective upon publication of this notice on December 7, 2007.
Gary Bangs, Chief; Explosives Industry Programs Branch; Arson and Explosives Programs Division; Bureau of Alcohol, Tobacco, Firearms and Explosives; United States Department of Justice; 99 New York Avenue, NE., Washington, DC 20226 (202-648-7120).
The list is intended to include any and all mixtures containing any of the materials on the list. Materials constituting blasting agents are marked by an asterisk. While the list is comprehensive, it is not all-inclusive. The fact that an explosive material is not on the list does not mean that it is not within the coverage of the law if it otherwise meets the statutory definitions in 18 U.S.C. 841. Explosive materials are listed alphabetically by their common names followed, where applicable, by chemical names and synonyms in brackets.
The Department has not added any new terms to the list of explosives or removed or revised any listing since its last publication.
This list supersedes the List of Explosive Materials dated September
Pursuant to 18 U.S.C. 841(d) and 27 CFR 555.23, I hereby designate the following as explosive materials covered under 18 U.S.C. 841(c):
PETN [nitropentaerythrite, pentaerythrite tetranitrate, pentaerythritol tetranitrate]
Notice.
The Department of Labor, as part of its continuing effort to reduce paperwork and respondent burden, conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed and/or continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA95) [44 U.S.C. 3506(c)(2)(A)]. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. Currently, the Employment Standards Administration is soliciting comments concerning its proposal to extend OMB approval of the information collection: Claim for Continuance of Compensation (CA-12). A copy of the proposed information collection request can be obtained by contacting the office listed below in the addresses section of this Notice.
Written comments must be submitted to the office listed in the addresses section below on or before February 5, 2008.
Mr. Steven Andoseh, U.S. Department of Labor, 200 Constitution Ave., NW, Room S-3201, Washington, DC 20210, telephone (202) 693-0373, fax (202) 693-1451,
The Office of Workers' Compensation Programs (OWCP) administers the Federal Employees' Compensation Act (FECA), 5 U.S.C. 8133. The Act provides that eligible dependents of deceased employees receive compensation benefits on account of the employee's death. OWCP has to monitor death benefits for current marital status, potential for dual benefits, and other criteria for qualifying as a dependent under the law. The CA-12 is sent annually to beneficiaries in death cases to ensure that their status has not changed and that they remain entitled to benefits. This information collection is currently approved for use through June 30, 2008.
The Department of Labor is particularly interested in comments which:
• Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
• Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
• Enhance the quality, utility and clarity of the information to be collected; and
• Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology,
The Department of Labor seeks the approval for the extension of this currently approved information collection in order to ensure that compensation is being paid correctly and to determine eligibility for benefits.
Comments submitted in response to this notice will be summarized and/or included in the request for Office of Management and Budget approval of the information collection request; they will also become a matter of public record.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and Trademark office, and are available for licensing.
December 7, 2007.
James J. McGroary, Patent Counsel, Marshall Space Flight Center, Mail Code LS01, Huntsville, AL 35812; telephone (256) 544-0013; fax (256) 544-0258.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and Trademark Office, and are available for licensing.
December 7, 2007.
Robert M. Padilla, Patent Counsel, Ames Research Center, Code 202A-4, Moffett Field, CA 94035-1000; telephone (650) 604-5104; fax (650) 604-2767.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and
December 7, 2007.
Bryan A. Geurts, Patent Counsel, Goddard Space Flight Center, Mail Code 140.1, Greenbelt, MD 20771-0001; telephone (301) 286-7351; fax (301) 286-9502.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below are assigned to the National Aeronautics and Space Administration, and are the subjects of patent applications that have been filed in the United States Patent and Trademark office, and are available for licensing.
December 7, 2007.
Mark W. Homer, Patent Counsel, NASA Management Office—JPL, 4800 Oak Grove Drive, Mail Stop 180-200, Pasadena, CA 91109; telephone (818) 354-7770.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and Trademark office, and are available for licensing.
December 7, 2007.
Edward K. Fein, Patent Counsel, Johnson Space Center, Mail Code AL, Houston, TX 77058-8452; telephone (281) 483-4871; fax (281) 483-6936.
National Aeronautics and Space Administration.
Notice of Availability of Inventions for Licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and Trademark office, and are available for licensing.
December 7, 2007.
Randy Heald, Patent Counsel, Kennedy Space Center, Mail Code CC-A, Kennedy Space Center, FL 32899; telephone (321) 867-7214; fax (321) 867-1817.
National Aeronautics and Space Administration.
Notice of availability of inventions for licensing.
The inventions listed below assigned to the National Aeronautics and Space Administration, have been filed in the United States Patent and Trademark office, and are available for licensing.
December 7, 2007.
Linda B. Blackburn, Patent Counsel, Langley Research Center, Mail Code 141, Hampton, VA 23681-2199; telephone (757) 864-3221; fax (757) 864-9190.
National Science Foundation.
Submission for OMB Review; Comment Request.
The National Science Foundation (NSF) has submitted the following information collection requirement to OMB for review and clearance under the Paperwork Reduction Act of 1995, Pub. L. 104-13. This is the second notice for public comment; the first was published in the
Suzanne Plimpton at (703) 292-7556 or send e-mail to
NSF may not conduct or sponsor a collection of information unless the collection of information displays a currently valid OMB control number and the agency informs potential persons who are to respond to the collection of information that such persons are not required to respond to the collection of information unless it displays a currently valid OMB control number.
The National Science Foundation (NSF) requests renewal of program accountability and communication data collections (e.g. surveys, face-to-face and telephone interviews, observations, and focus groups) that describe and track the impact of NSF funding that focuses on the Nation's science, technology, engineering and mathematics (STEM) education and STEM workforce. NSF funds grants, contracts, and cooperative agreements to colleges, universities, and other eligible institutions, and provides graduate research fellowships to individuals in all parts of the United States and internationally.
The Directorate for Education and Human Resources (EHR), a unit within NSF, promotes rigor and vitality within the Nation's STEM education enterprise to further the development of the 21st century's STEM workforce and public scientific literacy. EHR does this through diverse projects and programs that support research, extension, outreach, and hands-on activities serving STEM learning and research at all institutional (e.g. pre-school through postdoctoral) levels in formal and informal settings; and individuals of all ages (birth and beyond). EHR also focuses on broadening participation in STEM learning and careers among United States citizens, permanent residents and nationals, particularly those individuals traditionally underemployed in the STEM research workforce, including but not limited to women, persons with disabilities, and racial and ethnic minorities.
At the request of the Office of Management and Budget (OMB) an EHR Generic Clearance was established in 1995 to integrate management, monitoring and evaluation information pertaining to the NSF's Education and Training (E & T) portfolio in response to the Government Performance and Results Act (GPRA) of 1993. Under this generic survey clearance (OMB 3145-0136), data from the NSF administrative databases are incorporated with findings gathered through initiative-, divisional-, and program-specific data collections. The scope of the EHR Generic Clearance primarily covers descriptive information gathered from education and training projects that are funded by NSF. Most programs subject to EHR Generic data collection are funded by the EHR Directorate, but some are funded in whole or in part by disciplinary directorates or multi-disciplinary or cross-cutting programs. Since 2001 in accordance with OMB's Terms of Clearance, NSF primarily uses the data from the EHR Generic Clearance for program planning, management and audit purposes to respond to queries from the Congress, the public, NSF's external merit reviewers who serve as advisors, including Committees of Visitors, and the NSF's Office of the Inspector General.
OMB has limited the collection to three categories of descriptive data: (1) Staff and project participants (data that are also necessary to determine
Use of the Information: This information is required for effective administration, communication, program and project monitoring and evaluation, and for measuring attainment of NSF's program, project and strategic goals, as required by the President's Management agenda as represented by the Office of Management and Budget's (OMB) Program Assessment Rating Tool (PART); the Deficit Reduction Act of 2005 (Pub. L. 109-171) which established the Academic Competitiveness Council (ACC), and the NSF's Strategic Plan. The Foundation's FY 2006-2011 Strategic Plan describes four strategic outcome goals of Discovery, Learning, Research Infrastructure, and Stewardship. NSF's complete strategic plan may be found at:
The work of the multi-agency ACC employed a methodological framework to determine STEM education program effectiveness. The ACC was chaired by the Department of Education, and other agencies that participated included the NSF and the National Aeronautics and Space Administration (NASA). The ACC suggested cross-agency STEM education goals and metrics and developed a framework or “
Since the EHR Generic Clearance research is primarily used for accountability purposes, including responding to queries from Committees of Visitors and other scientific experts, a census rather than sampling design typically is necessary. At the individual project level, funding can be adjusted based on individual project's responses to some of the surveys. Some data collected under the EHR Clearance serve as baseline data for separate research and evaluation studies. The EHR Generic Clearance may be used to clear data collections for other ACC agencies, such as NASA. In February 2007 NASA and NSF signed a
In order to conduct program or portfolio level evaluations, however, both experimental and quasi-experimental evaluation research studies on STEM education interventions require researchers to identify individual-level and organizational or project-level control and treatment groups or comparison groups. NSF-funded contract or grantee researchers and evaluators in part may identify control, comparison, or treatment groups for NSF's E&T portfolio using some of the descriptive data gathered through OMB 3145-0136 to conduct well-designed, rigorous research and portfolio evaluation studies.
In accordance with the 2001 and 2005 OMB terms of clearance, NSF requests separate stand-alone clearance (and separately announces for comment in the
Nuclear Regulatory Commission.
Environmental assessment (EA) and finding of no significant impact (FONSI).
Amy M. Snyder, Fuel Manufacturing Branch, Division of Fuel Cycle Safety and Safeguards, Office of Nuclear Material Safety and Safeguards, U.S. Nuclear Regulatory Commission, Mail Stop EBB-2C40M, Washington, DC 20555-0001, telephone (301) 492-3225 and e-mail
Under U.S. Nuclear Regulatory Commission (NRC) license SNM-42 and the provisions of 10 CFR Part 70, Domestic Licensing of Special Nuclear Material, BWX Technologies, Inc. (BWXT or the licensee) is authorized to receive and possess special nuclear material for the research, fabrication and assembly of nuclear fuel and related components at its facility, located in Lynchburg, Virginia. Under this license, BWXT is also allowed to receive, acquire, and transfer irradiated fuel (spent nuclear fuel) at its facility. The NRC staff is considering the issuance of an exemption to requirements of Title 10 of the Code of Federal Regulations (10 CFR) Section 70.24, under a certain condition, for the spent nuclear fuel storage areas at the BWXT site. If the NRC decides to grant the exemption, then the license will be amended to incorporate a license condition to reflect
The NRC has prepared an EA in support of granting an exemption and amending the license. Based on this EA, the NRC has concluded that a FONSI is appropriate and, therefore, an environmental impact statement (EIS) is not warranted. The NRC is also conducting a safety review of the BWXT request for exemption. The results of the safety review will be documented in a separate Safety Evaluation Report.
By letter, dated May 2, 2007, BWXT submitted its exemption request. On May 14, 2007, BWXT submitted, via email, a clarification that stated its current Environmental Report (ER), dated March 10, 2004, addresses the areas where spent nuclear fuel, previously used for research, is stored at the site.
The documents that were evaluated in preparing this EA included the NRC's EA for Renewal of License SNM-42, dated August 2005, the current BWXT ER for Renewal of License SNM-42, dated March 10, 2004, and the e-mail from BWXT (Leah Morrell, May 14, 2007) stating, with respect to this exemption request, that the BWXT's ER, dated March 10, 2004, is the current ER.
The purpose of this EA is to assess the environmental impacts of the proposed exemption and associated license amendment. It does not approve the request. This EA is limited to the proposed exemption from the requirements of 10 CFR 70.24 in spent nuclear fuel storage areas, and any cumulative impacts on existing plant operations. The existing conditions and operations at the BWXT facility were evaluated, by the NRC, for environmental impacts in an EA for the renewal of the BWXT license. This assessment presents the information and analysis of the proposed actions for determining whether issuance of a FONSI is appropriate.
As a result of the events of September 11, 2001, the NRC has required heightened security measures for facilities that are authorized to possess special nuclear material. BWXT is one such facility. Following an evaluation, by BWXT, of ways to meet these required security measures, BWXT concluded that the best method to meet those measures would affect the current criticality monitoring system. Specifically, the implementation of BWXT's proposed method to implement the NRC Security Order (EA-07-011) would make the detection of a criticality challenging for the criticality monitoring systems located in each spent nuclear fuel storage area when the additional security measures imposed by EA-07-011 are in place. The additional security measures are not currently in place.
The proposed actions are: (1) The NRC granting an exemption to the requirements of 10 CFR 70.24 in the spent fuel storage areas during the period of time the licensee does not need to access the spent nuclear fuel; and (2) the NRC issuing an amendment to the license reflecting such an exemption. These actions would allow BWXT to continue to safely store spent nuclear fuel in storage systems. This exemption would not apply during the short and very infrequent periods during which access to the stored material is required, or if BWXT no longer has spent nuclear fuel at its licensed site. The proposed actions are in accordance with the licensee's application dated May 2, 2007.
The actions available to the NRC are:
1. Approve the exemption and associated license amendment as described; or
2. No action (i.e., deny the request and do not amend the license—the no-action alternative.)
The affected environment for the proposed action and the alternative is the BWXT site. The affected environment is identical to the affected environment assessed in the EA, dated August 2005. A full description of the site and its characteristics is given in the NRC's 2005 EA.
The NRC staff has completed its evaluation of the environmental impacts of the proposed action and concludes granting the licensee an exemption to the criticality monitoring requirements of 10 CFR 70.24 for the spent nuclear fuel storage system during periods when access to the spent nuclear fuel is not required; and would not increase the probability or consequences of accidents previously analyzed and would not affect facility radiation levels or facility radiological effluents. No changes are being made in the types of effluents that may be released off-site. There is no significant increase in the amount of any effluent released off-site. There is no significant increase in occupational or public radiation exposure. Therefore, there are no significant radiological environmental impacts associated with the proposed action.
With regard to potential non-radiological impacts, the proposed action does not have a potential to affect any historic sites because no previously undisturbed area will be affected by the proposed actions. The proposed action does not affect non-radiological plant effluents and has no other effect on the environment. Therefore, there are no significant non-radiological environmental impacts associated with the proposed action.
Accordingly, the NRC staff concludes that there are no significant environmental impacts associated with the proposed action and, thus, concludes that the proposed action will not have any significant impact to the human environment. The proposed action does not alter the previous National Environmental Protection Act findings made in approving the license renewal.
As an alternative to the proposed action, the NRC staff considered denial of the proposed action (i.e., the no-action alternative). Denial of the exemption request would result in: (1) No associated license amendment: and (2) no change to current environmental impacts, as the denial would result in the criticality monitoring requirements of 10 CFR 70.24 continuing to be fully applicable. Thus, the environmental impacts of the proposed action and the alternative action are identical because the present or absence of a criticality monitor and alarm for the spent nuclear fuel that is safety stored has no impact on the environment.
In accordance with NUREG 1748, “Environmental Review Guidance for Licensing Actions Associated with NMSS Programs,” the NRC staff consulted with other agencies regarding
The staff, on October 10, 2007, consulted with the Virginia Department of Environmental Quality (VDEQ) and the Virginia Department of Health (VDH). The VDEQ reviewed the draft and agreed with NRC's conclusion that no significant environmental impacts would result from this proposed action, if implemented. The VDH had technical questions regarding the criticality monitoring systems.
The staff has determined that consultation for Section 7 of the Endangered Species Act is not required because the proposed action does not involve construction or any other change in physical environment, therefore, will not affect listed species or critical habitat.
The staff has determined that the proposed action does not have the potential to effect on historic properties because it does not involve construction or any other change in physical environment. Therefore, no further consultation is required under Section 106 of the National Historic Preservation Act.
On the basis of the EA, the NRC concludes that the proposed action will not have a significant effect on the quality of the human environment and that preparation of an EIS is not warranted.
On the basis of this assessment, the Commission has concluded that environmental impacts that are associated with the proposed action would not be significant and the Commission is making a finding of no significant impact.
For the Nuclear Regulatory Commission.
Office of Management and Budget, Office of Federal Financial Management.
Comment request; final notice.
The Office of Management and Budget is consolidating and replacing four existing financial reporting forms (SF-269, SF-269A, SF-272, and SF-272A) with a single
Comments must be received by January 7, 2008.
Comments should be addressed to Marguerite Pridgen, Office of Federal Financial Management, Office of Management and Budget, 725 17th Street, NW., Washington, DC 20503; telephone 202-395-7844; fax 202-395-3952; e-mail
Marguerite Pridgen at the addresses noted above.
On April 8, 2003, OMB announced in the
The
Consistent with Federal efforts to promote standardization while giving agencies more flexibility in post-award administration, agencies may require recipients to submit interim
The April 8, 2003 announcement in the
Due to the number of the comments received and form revisions made, OMB announced that it intended to issue a second 60-day notice (68 FR 44975). However, instead of issuing a second 60-day notice, OMB chose other avenues such as a webcast and posting of the forms on Grants.gov to allow for public viewing and feedback (72 FR 7090). The primary concern raised to OMB through this interaction is that as the draft form was written, different officials could be responsible for the “Federal cash” and the “Federal Expenditures and Unobligated Balances” sections of the form. OMB determined that this was an issue for the submitting organization and therefore, OMB did not make any changes to the form based upon this concern. No other substantive comments were received during the webcast and posting and OMB did not make any changes based upon the posting. We anticipate that this will be the last notice before the form and instructions are finalized.
Requiring agencies to use all of the data elements in the proposed
In developing the standard pool of data elements, the workgroup assessed the SF-269, SF-269A, SF-272, and SF-272A, eliminating or combining many of the existing data elements. The
The
A single
The
Submission for OMB Review; Comment Request.
Agencies and the public are asked to comment on:
• Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
• The accuracy of the agency's estimate of the burden of the collection of information;
• Ways to enhance the quality, utility, and clarity of the information to be collected;
• Ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and
• Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
OMB, through this
This establishment of the government-wide
U.S. Office of Personnel Management (OPM).
Notice.
This gives notice of OPM decisions granting authority to make appointments under Schedules A, B, and C in the excepted service as required by 5 CFR 6.6 and 213.103.
C. Penn, Group Manager, Executive Resources Services Group, Center for Human Resources, Division for Human Capital Leadership and Merit System Accountability, 202-606-2246.
Appearing in the listing below are the individual authorities established under Schedules A, B, and C between October 1, 2007, and October 31, 2007. Future notices will be published on the fourth Tuesday of each month, or as soon as possible thereafter. A consolidated listing of all authorities as of June 30 is published each year.
No Schedule A appointments were approved for October 2007.
No Schedule B appointments were approved for October 2007.
The following Schedule C appointments were approved during October 2007.
5 U.S.C. 3301 and 3302; E.O. 10577, 3 CFR 1954-1958 Comp., p. 218.
Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Public Law 94-409, that the Securities and Exchange Commission will hold the following meetings during the week of December 10, 2007:
Open Meetings will be held on Tuesday, December 11, 2007, at 10 a.m., Thursday, December 13, 2007 at 9 a.m., and Monday, December 17, 2007 at 9 a.m., in Room L-002, the Auditorium, and a Closed Meeting will be held on Thursday, December 13, 2007 at 2 p.m.
Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the Closed Meeting. Certain staff members who have an interest in the matters may also be present.
The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(5), (7), (9)(B), and (10) and 17 CFR 200.402(a)(5), (7), 9(ii) and (10), permit consideration of the scheduled matters at the Closed Meeting.
Commissioner Atkins, as duty officer, voted to consider the items listed for the closed meeting in closed session.
The subject matter of the Open Meeting scheduled for Tuesday, December 11, 2007 will be:
1. The Commission will consider whether to approve the 2008 budget of the Public Company Accounting Oversight Board and will consider the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002.
2. The Commission will consider whether to adopt amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act of 1933 to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to certain restrictions, including the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period.
3. The Commission will consider whether to adopt amendments to mandate electronic filing of Form D and revise the information
4. The Commission will consider whether to publish a concept release to solicit public comment concerning possible revisions to the oil and gas reserves disclosure requirements. These requirements exist in their current form in Item 102 of Regulation S-K and Rule 4-10 of Regulation S-X under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The subject matter of the Open Meetings to be held on Thursday, December 13, 2007 at 9 a.m. and on Monday, December 17, 2007 at 9 a.m. will be:
The Commission will hold roundtable discussions on whether to provide U.S. issuers the choice of reporting their financial results under International Financial Reporting Standards. The roundtables will further explore the matters covered in the Commission's Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (Release 33-8831; 34-56217) and the responses received.
The subject matter of the Closed Meeting scheduled for Thursday, December 13, 2007 will be:
Formal orders of investigation;
Institution and settlement of injunctive actions;
Institution and settlement of administrative proceedings of an enforcement nature; and
Adjudicatory matters.
At times, changes in Commission priorities require alterations in the scheduling of meeting items.
For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact:
The Office of the Secretary at (202) 551-5400.
It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Kimber-X Resources Corp., a Delaware company with purported operations in Saskatchewan, Canada. Questions have arisen regarding the adequacy and accuracy of company press releases and other publicly-disseminated information concerning the company's current operations, issuance of securities, and transactions in company stock by company insiders.
The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of Kimber-X Resources Corp.
Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of Kimber-X Resources Corp. is suspended for the period from 9:30 a.m. EST, December 5, 2007, through 11:59 p.m. EST, on December 18, 2007.
By the Commission.
On October 12, 2006, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange proposes to add Amex rules 1600
As described in the Exchange's proposal,
The Fund and the Master Fund are commodity pools. The Master Fund is managed by Nuveen Commodities Asset Management, LLC (the “Manager”). The Manager is registered as a commodity pool operator (the “CPO”) and a commodity trading advisor (the “CTA”) with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).
The Manager will serve as the CPO and CTA of the Fund and the Master Fund. The Manager will determine the Master Fund's overall investment strategy, including: (i) The selection and ongoing monitoring of the Master Fund's sub-advisors; (ii) the management of the Fund's and Master Fund's business affairs; and (iii) the provision of certain clerical, bookkeeping and other administrative services. Gresham Investment Management LLC (the “Commodity Sub-Advisor”) will invest on a notional basis substantially all of the Master Fund's assets in commodity futures and forward contracts pursuant to a proprietary commodity investment strategy (the Tangible Asset Program® (“TAP®”))
The Exchange submits that proposed Amex Rules 1600
The Commission received one comment letter, submitted by the MFA,
In its response,
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
The Commission further believes that the proposal is consistent with section 11A(a)(1)(C)(iii) of the Act,
Furthermore, the Commission believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately. The Commission notes that the Exchange will, prior to listing, obtain a representation from the Fund that the NAV per share will be calculated daily and made available to all market participants at the same time.
The Commission also believes that the Exchange's trading halt rules are reasonably designed to prevent trading in the Shares when transparency is impaired. Proposed Amex Rule 1602(b)(ii) provides that the Exchange will halt trading in the Shares if the circuit breaker parameters of Amex Rule 117 have been reached. In exercising its discretion to halt or suspend trading in the Shares, the Exchange may consider factors such as those set forth in Amex Rule 918C(b) in addition to other factors that may be relevant. In particular, if the portfolio holdings and net asset value per share are not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the portfolio holdings or net asset value per share occurs. If the interruption to the dissemination of the portfolio holdings or net asset value per share persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption.
The Commission further believes that the trading rules and procedures to which the Shares will be subject pursuant to this proposal are consistent with the Act. The Exchange has represented that the Shares are equity securities subject to Amex's rules governing the trading of equity securities.
In support of this proposal, the Exchange has made the following representations:
(1) The Exchange's surveillance procedures are adequate to properly monitor the trading of the Shares. Specifically, Amex will rely on its existing surveillance procedures governing Index Fund Shares. In addition, Amex has represented that it has information sharing agreements with the InterContinental Exchange, the Chicago Mercantile Exchange, and the New York Mercantile Exchange and may obtain market surveillance information from other exchanges, including the Chicago Board of Trade, London Metals Exchange, and the New York Board of Trade through the Intermarket Surveillance Group.
(2) Prior to the commencement of trading, the Exchange will inform its members and member organizations in an Information Circular regarding the prospectus or delivery requirements that apply to the Shares. The Information Circular will also provide guidance with regard to member firm compliance responsibilities when effecting transactions in the Shares and highlighting the special risks and characteristics of the Funds and Shares, as well as applicable Exchange rules. In addition, the Information Circular will also reference the fact that there is no regulated source of last sale information regarding physical commodities and note the respective jurisdictions of the SEC and CFTC .
This approval order is based on the Exchange's representations.
Finally, the Commission believes that the daily disclosure requirements relating to the Fund's holdings and NAV are appropriate. Specifically, the Commission believes that daily disclosure of the Fund's NAV per share should aid investors in determining the degree to which the Shares are tracking the Fund's NAV per share. The Commission believes that the same is true for daily disclosure of the holdings of the Fund as such disclosure provides additional transparency. In addition, the Commission notes that the Exchange did not file an amendment seeking to change this disclosure requirement. Accordingly, the Commission does not believe that the commenter's assertions form a basis either to disapprove or to delay approval of the Exchange's proposed rule change and listing of the Fund.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On June 4, 2007, the American Stock Exchange LLC (“Amex”) filed and on September 18, 2007, amended, a proposed rule change with the Securities and Exchange Commission (“Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
Amex is revising Rule 724 to require each member that executes transactions on Amex's trading floor (“Floor”) to designate another member firm, allied member, registered representative, or any other person required to be registered as a broker-dealer under the Act that is physically located away from the Floor to act in a DK resolution capacity by means of telephone, e-mail, or fax submission. Each member will retain the option to also designate a Floor member to act on its behalf regarding DK notices.
The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered securities exchange. In particular, the Commission believes the proposal is consistent with Section 6(b)(5) of the Act,
On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 6 of the Act
For the Commission by the Division of Trading and Markets pursuant to delegated authority.
Pursuant to section 19(b)(7) of the Securities Exchange Act of 1934 (“Act”),
The proposed rule changes delete CBOT Rulebook Chapter 57 (Single Stock Futures) and Chapter 58 (Narrow-Based Stock Index Futures) in their entirety and substitute new CBOT Rulebook Chapter 34 (Single Stock Futures) and Chapter 35 (Narrow-Based Stock Index Futures). In addition, the proposed rule changes renumber current CBOT Regulations 431.07 (Customer Margins for Security Futures Positions Held in Futures Accounts) and 431.08 (Acceptable Margin for Security Futures and Treatment of Undermargined Accounts) as Rules 931 and 932.
The text of the proposed rule change is available on the Exchange's Web site (
The CBOT has prepared statements concerning the purpose of, and basis for, the proposed rules, burdens on competition, and comments received from members, participants, and others. The text of these statements may be examined at the places specified in Item IV below. These statements are set forth in sections A, B, and C below.
The CBOT has proposed to substitute new rulebook Chapters 34 and 35 for current Chapters 57 and 58, and to renumber current Regulations 431.07 and 431.08 as Rules 931 and 932 in connection with the adoption of a new rulebook for the CBOT as a result of the merger between the CBOT's former holding company, CBOT Holdings, Inc., and the former holding company of Chicago Mercantile Exchange Inc., CME Holdings Inc., to form the CME Group.
The Exchange has filed these proposed regulations pursuant to section 19(b)(7) of the Act.
The CBOT does not believe that the proposed rule changes will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Since the proposed rule changes will permit the CBOT to provide a trading venue for security futures, these rules will serve to enhance and promote competition.
The CBOT neither solicited nor received any written comments on the proposed regulations.
Pursuant to section 19(b)(7)(B) of the Act,
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an e-mail to
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
Nasdaq proposes a rule change to eliminate Nasdaq Rule 3350 and IM-3350 and to make conforming changes to other Nasdaq rules, as required by recent Commission rulemaking.
The text of the proposed rule change is below. Proposed new language is underlined; proposed deletions are in brackets.
[(a) With respect to trades executed on Nasdaq, no member shall effect a short sale for the account of a customer or for its own account in a Nasdaq Global Market security at or below the current best (inside) bid displayed in the National Market System when the current best (inside) bid is below the preceding best (inside) bid in the security. For purposes of this rule, the term “customer” includes a non-member broker-dealer.
(b) In determining the price at which a short sale may be effected after a security goes ex-dividend, ex-right, or ex-any other distribution, all quotation prices prior to the “ex” date may be
(c) The provisions of paragraph (a) shall not apply to:
(1) Sales by a registered market maker registered in the security on Nasdaq in connection with bona fide market making activity. For purposes of this paragraph, transactions unrelated to normal market making activity, such as index arbitrage and risk arbitrage that are independent from a member's market making functions, will not be considered bona fide market-making activity.
(2) Any sale by any person, for an account in which he has an interest, if such person owns the security sold and intends to deliver such security as soon as possible without undue inconvenience or expense.
(3) Sales by a member, for an account in which the member has no interest, pursuant to an order to sell which is marked “long”.
(4) Sales by a member to offset odd-lot orders of customers.
(5) Sales by a member to liquidate a long position which is less than a round lot, provided that such sale does not change the position of the member by more than one unit of trading.
(6) Sales by a person of a security for a special arbitrage account if the person then owns another security by virtue of which the person is, or presently will be, entitled to acquire an equivalent number of securities of the same class of securities sold; provided such sale, or the purchase which such sale offsets, is effected for the bona fide purpose of profiting from a current difference between the price of the security sold and the security owned and that such right of acquisition was originally attached to or represented by another security or was issued to all the holders of any such class of securities of the issuer.
(7) Sales by a person of a security effected for a special international arbitrage account for the bona fide purpose of profiting from a current difference between the price of such security on a securities market not within or subject to the jurisdiction of the United States and on such a securities market subject to the jurisdiction of the United States; provided the person at the time of such sale knows or, by virtue of information currently received, has reasonable grounds to believe that an offer enabling the person to cover such sale is then available to the person in such foreign securities market and intends to accept such offer immediately.
(8) Sales by an underwriter, or any member of a syndicate or group participating in the distribution of a security, in connection with an over-allotment of securities, or any layoff sale by such a person in connection with a distribution of securities through rights or a standby underwriting commitment.
(9) Sales of securities as to which all short sale price tests have been suspended by operation of a Pilot Order issued by the Commission pursuant to SEC Rule 202T.
(10) Sales of securities included in the Nasdaq 100 Index.
(11) Short sales of securities in the Nasdaq Crossing Network pursuant to NASDAQ Rule 4770 provided that:
(a) Such short sales involve securities that comprise the S&P 500 Index;
(b) Such short sales involve securities that qualify as “actively-traded securities” under Regulation M; or
(c) Such short sales are part of a basket transaction of 20 or more securities in which the subject security does not comprise more than five percent of the value of the basket traded.
(d) No member shall effect a short sale for the account of a customer or for its own account indirectly or through the offices of a third party to avoid the application of this Rule.
(e) No member shall knowingly, or with reason to know, effect sales for the account of a customer or for its own account to avoid the application of this Rule.
(f) A member that is not currently registered as a Nasdaq market maker in a security and that has acquired a security while acting in the capacity of a block positioner shall be deemed to own such security for the purposes of this Rule notwithstanding that such member may not have a net long position in such security if and to the extent that the member's short position in the security is the subject of offsetting positions created in the course of bona fide arbitrage, risk arbitrage, or bona fide hedge activities.
(g) For purposes of this Rule, a depositary receipt of a security shall be deemed to be the same security as the security represented by such receipt.
(h)(1) A member shall be permitted, consistent with its quotation obligations, to execute a short sale for the account of an options market maker that would otherwise be in contravention of this Rule, if:
(A) The options market maker is registered with a qualified options exchange as a qualified options market maker in a stock options class on a Nasdaq Global Market security or an options class on a qualified stock index; and
(B) The short sale is an exempt hedge transaction.
(2) For purposes of this paragraph:
(A)(i) An “exempt hedge transaction,” in the context of qualified options market makers in stock options classes, shall mean a short sale in a Nasdaq Global Market security that was effected to hedge, and in fact serves to hedge, an existing offsetting options position or an offsetting options position that was created in a transaction(s) contemporaneous with the short sale,
(ii) An “exempt hedge transaction,” in the context of qualified options market makers in stock index options classes, shall mean a short sale in a Nasdaq Global Market security that was effected to hedge, and in fact serves to hedge, an existing offsetting stock index options position or an offsetting stock index options position that was created in a transaction(s) contemporaneous with the short sale, provided that:
a. The security sold short is a component security of the index underlying such offsetting index options position;
b. The index underlying such offsetting index options position is a “qualified stock index;” and
c. The dollar value of all exempt short sales effected to hedge the offsetting stock index options position does not exceed the aggregate current index value of the offsetting options position.
(iii) Notwithstanding any other provision of this paragraph (h), any transaction unrelated to normal options market making activity, such as index arbitrage or risk arbitrage that in either case is independent of an options market maker's market making functions, will not be considered an “exempt hedge transaction.”
(B) A “qualified options market maker” shall mean an options market maker who has received an appointment as a “qualified options market maker” for certain classes of stock options on Nasdaq Global Market securities and/or index options on qualified stock indexes pursuant to the rules of a qualified options exchange.
(C) A “qualified options exchange” shall mean a national securities exchange that has approved rules and procedures providing for:
(i) Designating market makers as qualified options market makers, which standards shall be designed to identify options market makers who regularly engage in market making activities in the particular options class(es);
(ii) The surveillance of its market maker's utilization of the exemption set
(iii) Authorization of Nasdaq to withdraw, suspend or modify the designation of a qualified options market maker but only if a qualified options exchange has determined that the qualified options market maker has failed to comply with the terms of the exemption, and that such a withdrawal, suspension or modification of the market maker's exemption is warranted in light of the substantial, willful, or continuing nature of the violation.
(D) A “qualified stock index” shall mean any stock index that includes one or more Nasdaq Global Market securities, provided that more than 10% of the weight of the index is accounted for by Nasdaq Global Market securities and provided further that the qualification of an index as a qualified stock index shall be reviewed as of the end of each calendar quarter, and the index shall cease to qualify if the value of the index represented by one or more Nasdaq Global Market securities is less than 8% at the end of any subsequent calendar quarter.
(E) “Aggregate current index value” shall mean the current index value times the index multiplier.
(F) A member will not be in violation of paragraph (a) above if the member executes a short sale for the account of an options market maker that is in contravention of this paragraph (h), provided that the member did not know or have reason to know that the options market maker's short sale was in contravention of this paragraph (h).
(i)(1) A member shall be permitted, consistent with its quotation obligations, to execute a short sale for the account of a warrant market maker that would otherwise be in contravention of this Rule, if:
(A) The warrant market maker is a registered Nasdaq market maker for the warrant; and
(B) The short sale is an exempt hedge transaction that results in a fully hedged position.
(2) For purposes of this paragraph, an “exempt hedge transaction” shall mean a short sale in a Nasdaq Global Market security that was effected to hedge, and in fact serves to hedge, an existing offsetting warrant position or an offsetting warrant position that was created in a transaction(s) contemporaneous with the short sale.
(3) Nasdaq may withdraw, suspend or modify the exemption for a warrant market maker upon determination that the market maker has failed to comply with the terms of the exemption, and that such a withdrawal, suspension or modification of the market maker's exemption is warranted in light of the substantial, willful, or continuing nature of the violation.
(4) A member will not be in violation of paragraph (a) above if the member executes a short sale for the account of a warrant market maker that is in contravention of this paragraph (i), provided that the member did not know or have reason to know that the warrant market maker's short sale was in contravention of paragraph (i).
(j) Pursuant to the Rule 9600 Series or on Nasdaq's own motion, Nasdaq may exempt either unconditionally, or on specified terms and conditions, any transaction or class of transactions from the provisions of this Rule.
(k) Definitions:
(1) The term “short sale” shall have the same meaning as contained in SEC Rule 200, adopted pursuant to the Act.
(2) The term “block positioner” shall have the same meaning as contained in SEC Rule 3b-8(c) for “Qualified Block Positioner” adopted pursuant to the Act.
(l) This section shall be in effect until December 15, 2006.]
[
[
[(a)(1) In developing a Short Sale Rule for Nasdaq Global Market securities, Nasdaq has adopted an exemption to the Rule for certain market making activity. This exemption is an essential component of the Rule because bona fide market making activity is necessary and appropriate to maintain continuous, liquid markets in Nasdaq Global Market securities. Rule 3350(c)(1) states that short selling prohibitions shall not apply to sales by registered Nasdaq market makers in connection with bona fide market making activity and specifies that transactions unrelated to normal market making activity, such as index arbitrage and risk arbitrage that are independent from a member's market making functions, will not be considered as bona fide market making. Thus two standards are to be applied: One must be a registered Nasdaq market maker and one must engage in “bona fide” market making activity to take advantage of this exemption. With this interpretation, Nasdaq wishes to clarify for members some of the factors that will be taken into consideration when reviewing market making activity that may not be deemed to be bona fide market making activity and therefore would not be exempted from the Rule's application.
(2) First, as the Rule indicates, bona fide market making activity does not include activity that is unrelated to market making functions, such as index arbitrage and risk arbitrage that is independent from a member's market making functions. While these types of arbitrage activity appear to be suitable for the firm's overall hedging or risk management concerns, they do not warrant an exemption from the Rule. However, short sales of a security of a company involved in a merger or acquisition will be deemed bona fide market-making activity if made to hedge the purchase or prospective purchase (based on communicated indications of interest) of another security of a company involved in the merger or acquisition, which purchase was made, or is to be made, in the course of bona fide market making activity. The purchase of a security of a company involved in a merger or acquisition made to hedge a short sale of another security involved in the merger or acquisition, which sale was made in the course of bona fide market making activity, will not cause the sale to be deemed unrelated to normal market-making activity. Short sales made to hedge any such purchases or prospective purchases must be reasonably consistent with the exchange ratio (or exchange ratio formula) specified by the terms of the merger or acquisition.
(3) Similarly, bona fide market making would exclude activity that is related to speculative selling strategies of the member or investment decisions of the firm and is disproportionate to the usual market making patterns or practices of the member in that security. Nasdaq does not anticipate that a firm could properly take advantage of its market maker exemption to effectuate such speculative or investment short selling decisions. Disproportionate short selling in a market making account to effectuate such strategies will be viewed by Nasdaq as inappropriate activity that
(b) With respect to trades executed on or reported to Nasdaq, Rule 3350 requires that no member shall effect a short sale for the account of a customer or for its own account in a Nasdaq Global Market security at or below the current best (inside) bid displayed in the Nasdaq Market Center when the current best (inside) bid is below the proceeding best (inside) bid in the security. For purposes of this rule, the term “customer” includes a non-member broker-dealer. Nasdaq has determined that in order to effect a “legal” short sale when the current best bid is lower than the preceding best bid the short sale must be executed at a price of at least $0.01 above the current inside bid when the current inside spread is $0.01 or greater. The last sale report for such a trade would, therefore, be above the inside bid by at least $0.01.
(c)(1) Rule 3350 prohibits a member from effecting a short sale for the account of a customer or for its own account directly or through the offices of a third party for the purpose of avoiding the application of the Short Sale Rule. Further, the Rule prohibits a member from knowingly, or with reason to know, effecting sales for the account of a customer or for its own account for the purpose of avoiding the Rule. With this interpretation, Nasdaq wishes to clarify some of the circumstances under which a member would be deemed to be in violation of Rule 3350.
(2) For example, in instances where the current best bid is below the preceding best bid, if a market maker alone at the inside best bid were to lower its bid and then raise it to create an “up bid” for the purpose of facilitating a short sale, Nasdaq would consider such activity to be a manipulative act and a violation of Nasdaq's Short Sale Rule. Nasdaq also would consider it a manipulative act and a violation of the Rule if a market maker with a long stock position were to raise its bid above the inside bid and then lower it to create a “down bid” for the purpose of precluding market participants from selling short. In addition, if a market maker agrees to an arrangement proposed by a member or a customer whereby the market maker raises its bid in Nasdaq in order to effect a short sale for the other party and is protected against any loss on the trade or on any other executions effected at its new bid price, the market maker would be deemed to be in violation of Rule 3350. Similarly, a market maker would be deemed in violation of the Rule if it entered into an arrangement with a member or a customer whereby it used its exemption from the rule to sell short at the bid at successively lower prices, accumulating a short position, and subsequently offsetting those sales through a transaction at a prearranged price, for the purpose of avoiding compliance with the Rule, and with the understanding that the market maker would be guaranteed by the member or customer against losses on the trades.
(3) Nasdaq believes that members' activities to circumvent the Rule through indirect actions such as executions with other members or through facilitation of customer orders while being protected from loss are antithetical to the purposes of the Rule. Accordingly, Nasdaq will consider any such activity as a violation of Rule 3350.
(d) Nasdaq calculates changes to the inside bid displayed in the Nasdaq Market Center and disseminates a “bid arrow” via Nasdaq data feeds for market participants to use to comply with Rule 3350 when utilizing the execution functionality of the Nasdaq Market Center. The initial bid arrow each day shall be calculated at market open as follows.
(1) For stocks subject to Rule 4709(c), the initial bid arrow after completing the process described in Rule 4709(c)(1) through (3) shall be up and the next and subsequent bid arrows shall be calculated by comparing the bid arrow with each quotation update processed by the Nasdaq system after the system begins processing pursuant to Rule 4709(c)(4).
(2) For stocks described in Rule 4704(d), the initial bid arrow at the conclusion of the Nasdaq Opening Cross shall be up and the next and subsequent bid arrows shall be calculated by comparing the bid arrow with each quotation update processed by the Nasdaq system after the Nasdaq Opening Cross concludes.]
(a) To the extent such information is not otherwise reported to the NASD in conformance with NASD Rule 3360, each member shall maintain a record of total “short” positions in all customer and proprietary firm accounts in securities listed on Nasdaq and shall regularly report such information to Nasdaq in such a manner as may be prescribed by Nasdaq. Reports shall be made as of the close of the settlement date designated by Nasdaq. Reports shall be received by Nasdaq no later than the second business day after the reporting settlement date designated by Nasdaq.
(b) For purposes of this Rule:
(1) “short” positions to be reported are those resulting from “short sales” as that term is defined in SEC Rule 200(a) of Regulation SHO, with the exception of positions that meet the
(2) No change.
To foster competition among markets and further the development of the national market system following the repeal of NYSE Rule 500, Nasdaq shall permit issuers whose securities are listed on the New York Stock Exchange to apply also to list those securities on the Nasdaq Global Market (“NGM”). Nasdaq shall make an independent determination of whether such issuers satisfy all applicable listing requirements and shall require issuers to enter into a dual listing agreement with Nasdaq.
While Nasdaq shall certify such dually listed securities for listing on the NGM, Nasdaq shall not exercise its authority under Rule 4390 separately to designate or register such dually listed securities as Nasdaq national market system securities within the meaning of Section 11A of the Act or the rules thereunder. As a result, these securities, which are already designated as national market system securities under the Consolidated Quotation Service (“CQS”) and Consolidated Tape Association national market system plans (“CQ and CTA Plans”), shall remain subject to those plans and shall not become subject to the Nasdaq UTP Plan, the national market system plan governing securities designated by Nasdaq. For purposes of the national market system, such securities shall continue to trade under their current one, two, or three-character ticker symbol. Nasdaq shall continue to send all quotations and transaction reports in such securities to the processor for the CTA Plan. In addition, dually listed issues that are currently eligible for trading via the Intermarket Trading System (“ITS”) shall remain so and continue to trade on the Nasdaq Intermarket trading platform as they do today.
Through this interpretation, Nasdaq also resolves any potential conflicts that arise under Nasdaq rules as a result of a single security being both a security subject to the CQ and CTA Plans (a “CQS security”), which is subject to one set of rules, and a listed NGM security, which is subject to a different set of rules. Specifically, dually listed securities shall be Nasdaq securities for purposes of rules related to listing and delisting, and shall remain as CQS securities under all other Nasdaq rules. Treating dually listed securities as CQS securities under Nasdaq rules is consistent with their continuing status as CQS securities under the CTA, CQ, and ITS national market system, as described above. This interpretation also preserves the status quo and avoids creating potential confusion for investors and market participants that currently trade these securities on Nasdaq.
For example, Nasdaq shall continue to honor the trade halt authority of the primary market under the CQ and CT Plans. Nasdaq Rule 4120(a)(2) and (3) governing CQS securities shall apply to dually listed securities, whereas Nasdaq Rule 4120(a)(1), (4), (5), (6), and (7) shall not. [SEC Rule 10a-1 governing short sales of CQS securities shall continue to apply to dually listed securities, rather than Nasdaq Rule 3350 governing short sales of Nasdaq-listed securities.] Market makers in dually listed securities shall retain all obligations imposed by the Nasdaq Rule 5200 Series regarding CQS securities rather than assuming the obligations appurtenant to Nasdaq-listed securities. The fees applicable to CQS securities set forth in Nasdaq Rule 7010 shall continue to apply to dually listed issues.
(1) General—A System order is an order that is entered into the System for display and/or execution as appropriate. Such orders are executable against marketable contra-side orders in the System.
(A) All System Orders shall indicate limit price and whether they are a buy, short sale, [short-sale exempt,] or long sale. Systems Orders can be designated as Market Hours Immediate or Cancel (“MIOC”), Market Hours Good-till-Cancelled (“MGTC”), Market Hours Day (“MDAY”), System Hours Expire Time (“SHEX”), System Hours Day (“SDAY”), System Hours Immediate or Cancel (“SIOC”), System Hours Good-till-Cancelled (“SGTC”), or Good-til-Market Close “GTMC”).
(B)-(C) No change.
(2)
(3)-(4) No change.
(1) No change. The Order Routing Process shall be available to Participants from 7 a.m. until 8 p.m. Eastern Time, and shall route orders as described below: Beginning March 5, 2007, in connection with the trading of securities governed by Regulation NMS, all routing of orders shall comply with Rule 611 of Regulation NMS under the Exchange Act.
(A)-(B) No change.
(C) Priority of Routed Orders. Regardless of the routing option selected, orders sent by the System to other markets do not retain time priority with respect to other orders in the System and the System shall continue to execute other orders while routed orders are away at another market center. Once routed by the System, an order becomes subject to the rules and procedures of the destination market including, but not limited to, [short-sale regulation and] order cancellation. If a routed order is subsequently returned, in whole or in part, that order, or its remainder, shall receive a new time stamp reflecting the time of its return to the System.
Until such time as Nasdaq withdraws from the ITS Plan, Quotes and Orders that are eligible for ITS will be processed by the System and routed to the appropriate Non-Nasdaq Participant Market as an ITS Commitment in accordance with the requirements of the ITS Plan and all applicable Nasdaq rules. Nasdaq shall participate in the ITS Plan as set forth below.
(a) No change.
(b) Inbound ITS Commitments
(1) No change.
(2) [If the ITS Commitment, if executed, would result in a violation of SEC Rule 10a-1, the Nasdaq Market Center will decline it.]
(3) No change.
(c) Outbound Commitments: Any “commitment to trade,” which is transmitted by Nasdaq to another Non-Nasdaq ITS Participant Market through ITS, shall be firm and irrevocable for the period of thirty seconds following transmission by the sender. All such commitments to trade shall, at a minimum:
(1)-(5) No change.
[(6) designate the commitment “short” or “short exempt” whenever it is a commitment to sell which, if it
(d)-(e) No change.
In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change. The text of these statements may be examined at the places specified in Item IV below, and is set forth in sections A, B, and C below.
On June 13, 2007, the SEC voted to adopt certain amendments to SEC Rule 10a-1 and Regulation SHO under the Act. The amendments, among other things: (1) Eliminate the short sale price test contained in SEC Rule 10a-1; (2) add Rule 201(a) of Regulation SHO to provide that no price test, including any price test of any self-regulatory organization (“SRO”), shall apply to short sales in any security; (3) add Rule 201(b) of Regulation SHO to prohibit any SRO from having a price test; and (4) amend Rule 200(g) of Regulation SHO to remove the requirement that a broker-dealer mark a sell order of an equity security as “short exempt” if the seller is relying on an exception from the price test of Rule 10a-1, or any price test of any exchange or national securities association. The amendments to SEC Rule 10a-1 and Regulation SHO became effective on July 3, 2007, and had a July 6, 2007 compliance date.
The purpose of this proposed rule change is to make conforming changes to Nasdaq rules to reflect the elimination of SEC Rule 10a-1 and other amendments to Regulation SHO by: (1) Eliminating references to SEC Rule 10a-1 in Nasdaq rules; and (2) repealing Nasdaq's short sale rule contained in Rule 3350 and IM-3350, as well as amending Nasdaq rules that reference Rule 3350 or IM-3350.
Nasdaq believes that the proposed rule change is consistent with the provisions of section 6(b)(5) of the Act,
Nasdaq does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
Written comments on the proposed rule change were neither solicited nor received.
Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to section 19(b)(3)(A) of the Act
At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an e-mail to
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
NSX is proposing a change to its Rules and Fee Schedule to modify its market data rebate program and its liquidity provider rebate program for transactions that are executed through NSX BLADE
In its filing with the Commission, NSX included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NSX has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
Pursuant to Exchange Rule 16.1(a), the Exchange maintains a Fee Schedule that contains its current fees, dues and other charges applicable to transactions in NSX BLADE (the “NSX BLADE Fee Schedule”). Currently, the NSX BLADE Fee Schedule provides for a rebate of $0.0030 per share for adding liquidity into NSX BLADE through transactions in which ETP Holders have selected the Automatic Execution mode of order interaction (“AutoEx”), regardless of which symbol such transaction involves. Similarly, orders that are AutoEx at less than $1.00 per share will result in a rebate for a dollar amount equal to 0.3% of the price per share, multiplied by the number of shares executed. The Exchange also currently provides a 100% pro rata transaction credit of gross Tape “A”, “B” and “C” market data revenue associated with
The Exchange is proposing that the NSX BLADE Fee Schedule be modified to include the concept of Designated ETF Shares, which are certain Exchange Traded Funds and Exchange Traded Notes (hereinafter “ETF Shares”) that the Exchange has determined should be subject to different liquidity providing and market data rebates than other symbols. These Designated ETF Shares are generally all Exchange Traded Funds and Exchange Traded Notes that are eligible to trade on the Exchange except for the Nasdaq-100 Index, more commonly referred to as the QQQQs. The Designated ETF Shares are listed by the Exchange on Exhibit A to the NSX BLADE Fee Schedule.
ETP Holders providing liquidity using AutoEx in Designated ETF Shares will receive a rebate of $0.0035 per share executed. Similarly, ETP Holders providing liquidity on orders executed at less than $1.00 per share using AutoEx in Designated ETF Shares will result in a rebate for a dollar amount equal to 0.35% of the price per share, multiplied by the number of shares executed. However, trades using AutoEx in Designated ETF Shares would no longer be eligible for market data revenue transaction credits as reflected in the amendments to Exchange Rule 16.2(b). The change in the liquidity provider and market data rebates is being proposed in order to increase trading volume in these Designated ETF Shares. There is no need to provide a similar incentive to increase trading volume in the securities that are not contained in the Exhibit A. These changes would be effective October 1, 2007.
The same trades in non-Designated ETF Shares using AutoEx, as well as all trades using the Order Delivery mode of order interaction as set forth in Exchange Rule 11.13(b)(2) (“Order Delivery”), would continue to receive the current rebate. Thus, for orders executed at $1.00 or more per share for non-Designated ETF shares, the liquidity provider rebate remains $0.0030 per share executed and, for all orders executed at a $1.00 or more per share using Order Delivery, the liquidity provider rebate remains $0.0028 per share executed.
The Exchange is also proposing to delete the provision relating to ITS Transactions in the Fee Schedule as the Intermarket Trading System Plan has expired and therefore, the provision is no longer applicable.
Pursuant to Exchange Rule 16.1(c), the Exchange will “provide ETP Holders with notice of all relevant dues, fees, assessments and charges of the Exchange” through the issuance of a Regulatory Circular of the changes to the NSX BLADE Fee Schedule and will provide a copy of the rule filing on the Exchange's Web site (
The Exchange liquidity provider rebates and market data rebates have been designed in this manner in order to ensure that the Exchange can continue to fulfill its obligations under the Act. Moreover, the proposed liquidity provider and market data rebates are not discriminatory in that all ETP Holders are eligible to trade in Designated ETF Shares listed on Exhibit A using AutoEx and may do so at their discretion.
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act,
The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended.
Written comments on the proposed rule change were neither solicited nor received.
The foregoing proposed rule change is filed pursuant to Section 19(b)(3)(A)(ii) of the Act
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an e-mail to
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On October 18, 2007, NYSE Arca, Inc. (“NYSE Arca” or “Exchange”), through its wholly owned subsidiary, NYSE Arca Equities, Inc. (“NYSE Arca Equities”), filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
NYSE Arca Equities Rule 5.2(j)(6)(B)(I) currently permits the Exchange to list and trade, pursuant to Rule 19b-4(e) under the Act,
In its proposal, the Exchange stated its belief that trading in exchange-listed Closed-End Fund Securities and ETF Securities is subject to the same level of regulation as trading in exchange-listed equity securities. In addition, the Exchange stated that Closed-End Fund Securities and ETF Securities trade on the same exchange platforms as equity securities registered under the Act and are subject to the same exchange trading rules as equity securities. As such, the Exchange believes that it is appropriate to permit their inclusion as components of indexes underlying Equity Index-Linked Securities.
The Exchange also proposes to amend NYSE Arca Equities Rule 5.2(j)(6)(B)(I)(1)(b)(2)(v) to incorporate a limited exception to the requirement that 90% of the index's numerical value and at least 80% of the total number of component securities underlying an Equity Reference Asset must meet the then current criteria for standardized options trading set forth in NYSE Arca Rule 5.3. The Exchange proposes that an underlying index would not be subject to such requirement if (1) no underlying component security represents more than 10% of the dollar weight of such index, and (2) such index has a minimum of 20 component securities.
All of the options exchanges apply the same criteria to securities underlying exchange-traded options.
After careful review and based on the Exchange's representations, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
With respect to the proposal to permit the inclusion of Closed-End Fund Securities and ETF Securities in an underlying index of a series of Equity Index-Linked Securities, the Commission notes that issuers of Closed-End Fund Securities and ETF Securities must register under the 1940 Act, and such securities must be listed on a national securities exchange. The Commission also notes that Closed-End Securities and ETF Securities trade on the same platforms as equity securities and are generally subject to the same exchange trading rules as equity securities. In addition, in order for such securities to be included in an underlying index of an issue of Equity Index-Linked Securities, it must be an NMS stock, as defined in Rule 600(b)(47) of Regulation NMS.
The Commission further believes that the proposal to provide for a limited exception to NYSE Arca Equities Rule 5.2(j)(6)(B)(I)(1)(b)(2)(v) reasonably balances the removal of impediments to a free and open market with the protection of investors and the public interest, two principles set forth in Section 6(b)(5) of the Act. The Commission notes that the minimum trading volume standard relating to the eligibility of securities underlying options overlaps with, and is less stringent than, the equivalent trading volume standards provided in NYSE Arca Equities Rules 5.2(j)(6)(B)(I)(1)(b)(2)(ii) and (iii). Because the overall purpose of the current criteria for standardized options trading is to ensure proper liquidity of the underlying security, the Commission believes that the minimum market value thresholds of NYSE Arca Equities Rule 5.2(j)(6)(B)(I)(1)(b)(2)(i), the minimum trading volume requirements provided in NYSE Arca Equities Rules 5.2(j)(6)(B)(I)(1)(b)(2)(ii) and (iii), together with the enhanced concentration limits and increased minimum number of component securities needed in order to avail of the proposed exemption to NYSE Arca Equities Rule 5.2(j)(6)(B)(I)(1)(b)(2)(v), will help ensure adequate liquidity of each component comprising an underlying index of Equity Index-Linked Securities. As such, the Commission believes it is reasonable and consistent with the Act for the Exchange to modify the listing standards for Equity Index-Linked Securities in the manner described in the proposal.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange, through its wholly-owned subsidiary NYSE Arca Equities, Inc. (“NYSE Arca Equities”), has amended the rules governing NYSE Arca, LLC (also referred to as the “NYSE Arca Marketplace”), which is the equities trading facility of NYSE Arca Equities, on a pilot program basis (“Pilot Program”) to amend the initial and continued financial listing standards for common stock of operating companies. The Pilot Program expires on November 30, 2007. The Exchange proposes to extend the Pilot Program until May 31, 2008.
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
NYSE Arca has amended on a pilot program basis the rules governing the NYSE Arca Marketplace to amend the financial listing standards for common stock of operating companies.
The Pilot Program expires on November 30, 2007. The Exchange proposes to extend the Pilot Program until May 31, 2008. This extension will permit Exchange staff to prepare the rule filing proposing to permanently adopt the Pilot Program.
The proposed rule change is consistent with Section 6(b) of the Act,
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
The Exchange has neither solicited nor received written comments on the proposed rule change.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed under Rule 19b-4(f)(6) normally may not become operative prior to 30 days after the date of filing. However, Rule 19b-4(f)(6)(iii)
At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such proposed rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an e-mail to
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
On June 28, 2007, The Options Clearing Corporation (“OCC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-OCC-2007-08 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”).
The proposed rule change permits OCC to clear and settle binary options, including fixed return options (“FROs”) to be listed and traded by Amex
A binary option, other than a CDO or CDBO, is in the money and will be automatically exercised if its underlying interest value as measured against its exercise price is determined to meet the criteria for automatic exercise as specified in the Exchange Rules of the listing Exchange.
(1)
“Binary option” is defined in Article XIV, Section 1 of the By-Laws, and the definition is cross-referenced in Article I of the By-Laws.
The definitions of “option contract” and “type of option” in Article I of the By-Laws is amended to include a binary option.
OCC is redefining the term “class” in Article XIV, Section 1 so that it will apply to binary options generally. To be within the same class, binary options
The definition of “exercise price” in Article I is replaced with respect to binary options with a revised definition in Article XIV, Section 1 that will recognize that binary options will be settled by a fixed cash payment. The exercise price of a binary option neither is an amount that is paid in exchange for an underlying interest nor is used to determine the exercise settlement amount as in the case of other cash-settled options. In the case of a binary option other than a CDO or CDBO, the exercise price of a binary option is simply a defined value or range of values for the underlying interest. If the underlying interest value falls within the defined range at expiration of such binary option, the option will be automatically exercised; otherwise, the option will expire unexercised. A CDO or CDBO is said to have no exercise price.
OCC is redefining the term “underlying interest” in Article XIV, Section 1 so that it will apply to binary options generally. In the case of a binary option other than a CDO or CDBO, the underlying interest is the underlying security, securities, index, basket, or measure whose value is compared to such option's exercise price to determine whether the option is in the money and will be automatically exercised. In conjunction with the revised definitions of “exercise price” and “underlying interest,” OCC is also adding a new defined term, “underlying interest value,” to Article XIV, Section 1. When used with respect to a binary option other than a CDO or CDBO, underlying interest value means the value or level of the unit of trading of the underlying interest at any point in time as reported by the reporting authority. A new definition for the term “unit of trading” states “unit of trading” when used with respect to a binary option means the quantity of the underlying interest on which the underlying interest value is based and is ordinarily a single share in the case of binary options on individual equity securities or one (1) in the case of binary index options. The terms “unit of trading” and “underlying interest value” will not be applicable to CDOs and CDBOs.
Other terms that were created or amended for CDOs and CDBOs are modified to apply to binary options generally.
(2)
Paragraph (e) of Article VI, Section 10 are further amended to apply to binary options generally.
(3)
Article XIV, Section 2B defines the general rights and obligations of holders and writers of binary options other than CDOs or CDBOs. As noted above, the holder of a binary option that is automatically exercised will have the right to receive the fixed exercise settlement amount from OCC, and the assigned writer will have the obligation to pay that amount to OCC.
(4)
Article XIV, Section 3A describes the methods by which binary options other than CDOs or CDBOs generally will be adjusted if adjustments are deemed to be necessary. Special adjustment rules are needed because of the fixed, cash-settlement feature of binary options. For instance, under Article VI, Section 11A(d), which governs adjustment of other equity options, if there is a stock dividend, distribution, or split whereby a whole number of shares of the underlying security is issued for each outstanding share, the exercise price is proportionately reduced, and the number of option contracts is increased by the number of shares issued with respect to each share of the underlying security. This adjustment would be inappropriate for binary options where the underlying interest is an equity security. For example, an XYZ option with an exercise price of $50 would be adjusted to become two XYZ options, each with an exercise price of $25. While the fixed exercise settlement amount of such binary option would be intended to remain at $100, such an adjustment would increase the total payout upon exercise to $200. To avoid this result, Article XIV, Section 3A(a)(4) will provide that the number of option contracts will not proportionally increase and only the exercise price will be adjusted. The other provisions of Article XIV, Section 3A are similar to Article VI, Section 11A with appropriate modifications for binary options. In order to maintain consistency with adjustment policies for physically settled stock options where such consistency is appropriate, certain changes in the treatment of dividends that were approved in SR-OCC-2006-01 and were to become effective at a future date will become effective on the same date for binary options on single stocks.
Article XIV, Section 3A(b) will govern adjustments of binary options for which the underlying interest is an index of equity securities and will be similar to Article XVII, Section 3, which governs index options, with appropriate modifications to reflect unique features of binary options. For instance, because binary options do not have an index multiplier, the Securities Committee will generally adjust the exercise price of a binary option of which the underlying interest is an index of equity securities to get the appropriate result.
Article XIV, Section 5, will give OCC the authority to fix the underlying interest value for a binary option other than a CDO or CDBO and to rely on that value for determining whether such binary option will be exercised under circumstances similar to those in which OCC may currently fix the exercise settlement amount for index options.
Article XIV, Section 6 will provide, in essence, that the underlying interest value of a series of binary options at expiration, other than CDOs or CDBOs, will be determined by the Exchange or Exchanges on which such series is traded subject to any overriding provision of OCC's By-Laws and Rules. If a series of options is traded on more than one Exchange, OCC could use the underlying interest value received from the Exchange deemed by OCC to be the principal Exchange, or OCC could employ a procedure to derive a single value based on some or all of the values received.
(5)
Binary options will not be subject to the exercise-by-exception procedures applicable to most other options under OCC's Rules but will instead be automatically exercised prior to or at expiration if the specified criterion for exercise is met. The procedures for the automatic exercise of binary options, as well as assignment and settlement of exercises (including provisions applicable to a suspended Clearing Member), will be set forth in Rules 1501 through 1505 of new Chapter XV and in revised Rule 801(b).
(6)
OCC will margin binary options through its usual “STANS” system. STANS has been modified to accommodate the particular binary options to be traded by Amex and the binary index product currently proposed by CBOE. CDOs and CDBOs will be margined as described in the applicable rule filings cited above.
OCC is not proposing to accept escrow deposits in lieu of clearing margin for binary options. Therefore, Rule 1506 will state that Rule 610, which otherwise would permit such deposits, does not apply to binary options.
(7)
This new provision will accelerate the expiration date of a binary option other than a CDO or CDBO when OCC determines in its discretion that the underlying interest value of such option has become fixed prior to the expiration of the option (
Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions.
On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and in particular Section 17A of the Act and the rules and regulations thereunder.
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Phlx proposes to amend Phlx Rule 1010 (“Withdrawal of Approval of Underlying Securities”) to enable the Exchange to cease listing additional series of equity options and to delist the class of equity options where the option has been trading on the Exchange not less than six (6) months and the Exchange average daily volume (“ADV”) of the entire class of options was less than twenty (20) contracts over the last six (6) month period.
The text of the proposed rule change is available at Phlx, the Commission's Public Reference Room, and
In its filing with the Commission, the Phlx included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Phlx has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
The purpose of the proposed rule change is to amend Phlx Rule 1010 to enable the Exchange to cease listing additional series of options and to delist the class of options where the option has been listed on the Exchange not less than six (6) months and the ADV of the entire class of options overlying the security over the last six (6) month period was less than twenty (20) contracts.
The Exchange's current Rule 1010 indicates that, allowing for exceptional circumstances, where requirements for continued listing (also known as maintenance criteria) for listed options are not met, additional series of options will not be opened and the options contracts may be delisted. The continued listing criteria in Phlx Rule 1010 is specific to the type of underlying security (
The Exchange proposes to enhance Phlx Rule 1010 by providing that the Exchange will not open for trading any additional series of equity option contracts of the class overlying a security and may delist the class of options if:
• The option has been listed on the Exchange not less than six (6) months; and
• The Exchange average daily volume of the entire class of options over the
The proposal also would provide that if an option is singly listed only on the Exchange, the Exchange will cease to add new series and may delist the option when there is no remaining open interest in the product.
The proposal further indicates that if the Exchange determines to delist an option it will notify the affected specialist (the specialist allocated trading in the option in question) not less than ten (10) days before the scheduled delisting date. Within two (2) days after receiving the notification, the specialist has the opportunity to respond in writing with a justification for and/or explanation of the low ADV in the relevant option and why he or she believes that the Exchange should continue to list the option. While the specialist's justification will not be dispositive to the Exchange's decision to delist, the Exchange may take the justification into consideration. The Exchange will indicate its delisting decision in writing to the specialist that submitted the justification letter.
The Exchange believes that its low ADV delisting proposal is consistent with the Phlx maintenance and delisting criteria in Phlx Rule 1010 and should reduce or eliminate the quotation traffic attendant to low volume options listings that may nevertheless experience significant quoting activity. The Exchange believes that this should in turn diminish the total number of strikes that need to be maintained by the Exchange and potentially may thereby reduce technology costs for the Exchange and its member organizations and free up Exchange capacity. The Phlx further believes that expanding the Exchange's ability to manage its quotation traffic should benefit not only the Exchange and its members, but also public and professional traders and ultimately the industry. Moreover, the proposal complements and extends the Exchange's efforts with respect to quote mitigation.
The Exchange notes that the proposal to stop adding series of equity options and to delist low ADV options is similar to low volume options delisting procedures in use by other options exchanges.
The Exchange believes that its proposal is consistent with Section 6(b) of the Act,
The Exchange believes that the proposed rule change will not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
No written comments were solicited or received.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's Internet comment form (
• Send an e-mail to rule-comments@sec.gov. Please include File Number SR-Phlx-2007-72 on the subject line.
• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
After careful consideration, the Commission finds that the Exchange's proposal to modify its rule regarding maintenance listings to allow for delisting of historically low volume options and to cease listing additional series of options is consistent with the requirements of the Section 6(b) of the Act
The Phlx has requested that the Commission find good cause for approving the proposed rule change prior to the thirtieth day after publication of the notice thereof in the
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
Notice of request for public comments.
The Department of State is seeking Office of Management and Budget (OMB) approval for the information collection described below. The purpose of this notice is to allow 60 days for public comment in the
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The Department will accept comments from the public up to 60 days from December 7, 2007.
You may submit comments by any of the following methods:
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Direct requests for additional information regarding the collection listed in this notice, including requests for copies of the proposed information collection and supporting documents, to Andrea Lage, who may be reached at (202) 663-1399.
We are soliciting public comments to permit the Department to:
• Evaluate whether the proposed information collection is necessary for the proper performance of our functions.
• Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used.
• Enhance the quality, utility, and clarity of the information to be collected.
• Minimize the reporting burden on those who are to respond, including the use of automated collection techniques or other forms of technology.
The Nonimmigrant Visa Electronic Application (DS-160) will be used to collect biographical information from individuals seeking a nonimmigrant visa. The consular officer uses the information collected to determine the applicant's eligibility for a visa. This collection combines questions from current information collections DS-156 (Nonimmigrant Visa Application), DS-156E (Nonimmigrant Treaty Trader Investor Application), DS-156K (Nonimmigrant Fiancé Application), DS-157 (Nonimmigrant Supplemental Visa Application), DS-158 (Contact Information and Work History Application), and DS-3052 (Nonimmigrant V Visa Application).
The DS-160 will be submitted electronically to the Department via the Internet. The applicant will be instructed to print a confirmation page containing a bar-coded record locator, which will be scanned at the time of processing. Applicants who submit the electronic application will no longer submit paper-based applications to the Department.
Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681,
For further information, including a list of the exhibit objects, contact Carol B. Epstein, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202/453-8048). The address is U.S. Department of State, SA-44, 301 4th Street, SW., Room 700, Washington, DC 20547-0001.
The ITAC will meet as the ITAC-R “National Committee” to prepare advice for the U.S. on the structure and chairs of new ITAC-R study groups, and Chairs for the ITU-R working parties, study groups, etc. on December 20, 2007, at the offices of the Boeing Company, 1200 Wilson Boulevard, Arlington, VA, 10 a.m.-Noon, Eastern Standard Time. Meeting details will be posted on the mailing list
The meetings are open to the public.
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of FY 2008 Grant Funding Opportunity.
FMCSA announces that it has published an opportunity to apply for FY 2008 Commercial Vehicle Information Systems and Networks (CVISN) Deployment grant funding on the grants.gov Web site (
FMCSA will initially consider funding of applications submitted by qualified applicants on or before April 15, 2008. If additional funding remains available, applications submitted after April 15, 2008 will be considered on a case-by-case basis. Funds will not be available for allocation until such time as the FY 2008 U.S. Department of Transportation appropriations legislation is passed and signed into law. Funding is subject to reductions resulting from obligation limitations or rescissions as specified in Safe, Accountable, Flexible, Efficient Transportation Efficiency Act: A Legacy for Users (SAFETEA-LU) or other legislation.
Information on the grant, application process, and additional contact information is available at the grants.gov Web site (
The Commercial Vehicle Information Systems and Networks (CVISN) grant funding is authorized by Section 4126 of SAFETEA-LU. The expected level of funding for CVISN in FY 2008 is $25,000,000. This is a discretionary grant program that provides funding for States and the District of Columbia to deploy, operate, and maintain elements of their CVISN programs, including commercial vehicle, commercial driver, and carrier-specific information systems and networks. The agency in each State and the District of Columbia that is designated as the primary agency responsible for the development, implementation, and maintenance of CVISN-related systems is eligible to apply for grant funding.
Applicants must be registered with grants.gov to apply for funding. Applicants who have not previously registered with grants.gov should visit:
Federal Motor Carrier Safety Administration (FMCSA), DOT.
Notice of applications for exemptions from the diabetes standard; request for comments.
FMCSA announces receipt of applications from 29 individuals for exemptions from the prohibition against persons with insulin-treated diabetes mellitus (ITDM) operating commercial motor vehicles (CMVs) in interstate commerce. If granted, the exemptions would enable these individuals with ITDM to operate commercial motor vehicles in interstate commerce.
Comments must be received on or before January 7, 2008.
You may submit comments bearing the Federal Docket Management System (FDMS) Docket ID FMCSA-2007-29286 using any of the following methods:
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Each submission must include the Agency name and the docket ID for this Notice. Note that DOT posts all comments received without change to
You may review the DOT's complete Privacy Act Statement in the
Dr. Mary D. Gunnels, Chief, Physical Qualifications Division, (202) 366-4001,
Under 49 U.S.C. 31136(e) and 31315, FMCSA may grant an exemption for a 2-year period if it finds “such exemption would likely achieve a level of safety that is equivalent to, or greater than, the level that would be achieved absent such exemption.” The statutes also allow the Agency to renew exemptions at the end of the 2-year period. The 29 individuals listed in this notice have recently requested an exemption from the diabetes prohibition in 49 CFR 391.41(b)(3), which applies to drivers of CMVs in interstate commerce. Accordingly, the Agency will evaluate the qualifications of each applicant to determine whether granting the exemption will achieve the required level of safety mandated by the statutes.
Mr. Aure, age 52, has had ITDM since 2006. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Aure meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A Commercial Driver's License (CDL) from Minnesota.
Mr. Bivins, 60, has had ITDM since 2005. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Bivins meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class B CDL from New Jersey.
Mr. Boggs, 52, has had ITDM since 2004. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Boggs meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Kansas.
Mr. Brock, 27, has had ITDM since 2000. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Brock meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class C operator's license from Texas.
Mr. Coryea, 42, has had ITDM since 2007. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Coryea meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from New York.
Mr. Crismore, 38, has had ITDM since 2006. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Crismore meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class A CDL from Montana.
Mr. Forer, 32, has had ITDM since 1992. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Forer meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class C operator's license from Pennsylvania.
Mr. Hewston, 47, has had ITDM since 2007. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Hewston meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Arizona.
Mr. Horvat, 23, has had ITDM since 2004. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Horvat meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class D operator's license from Minnesota.
Mr. Jarvi, 50, has had ITDM since 1981. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Jarvi meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class D operator's license from Wisconsin.
Mr. Jansen, 38, has had ITDM since 1971. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Jansen meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class D operator's license from Ohio.
Mr. Kibler, 54, has had ITDM since 1967. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kibler meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Pennsylvania.
Mr. Kruse, 64, has had ITDM since 2007. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Kruse meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class B CDL from Iowa.
Mr. McGee, 49, has had ITDM since 2006. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. McGee meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Oklahoma.
Mr. Medrano, 49, has had ITDM since 2006. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Medrano meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class C operator's license from California.
Mr. Mercado, 58, has had ITDM since 2006. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Mercado meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable proliferative diabetic retinopathy. He holds a Class A CDL from Montana.
Mr. Morin, 34, has had ITDM since 1987. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Morin meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class C operator's license from California.
Mr. Perkins, 31, has had ITDM since 1986. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Perkins meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class C operator's license from Nevada.
Ms. Polovino, 34, has had ITDM since 2007. Her endocrinologist examined her in 2007 and certified that she has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of her diabetes using insulin, and is able to drive a CMV safely. Ms. Polovino meets the requirements of the vision standard at 49 CFR 391.41(b)(10). Her ophthalmologist examined her in 2007 and certified that she does not have diabetic retinopathy. She holds a Class C chauffeur license from Michigan.
Mr. Reinhart, 53, has had ITDM since 2003. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Reinhart meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class C operator's license from California.
Mr. Russell, 35, has had ITDM since 2005. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Russell meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Ohio.
Mr. Schuch, 53, has had ITDM since 2000. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Schuch meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Massachusetts.
Mr. Short, 46, has had ITDM since 1996. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Short meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class C operator's license from Pennsylvania.
Mr. Skiles, 58, has had ITDM since 2007. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Skiles meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007
Mr. Valentine, 41, has had ITDM since 1974. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Valentine meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he has stable proliferative diabetic retinopathy. He holds a Class D operator's license from Tennessee.
Mr. Walsh, 64, has had ITDM since 1994. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Walsh meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Florida.
Mr. Witsch, 44, has had ITDM since 1999. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Witsch meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class C operator's license from California.
Mr. Woltman, 44, has had ITDM since 1979. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Woltman meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His ophthalmologist examined him in 2007 and certified that he has stable nonproliferative diabetic retinopathy. He holds a Class C operator's license from California.
Mr. Yocum, 52, has had ITDM since 2005. His endocrinologist examined him in 2007 and certified that he has had no hypoglycemic reactions resulting in loss of consciousness, requiring the assistance of another person, or resulting in impaired cognitive function that occurred without warning in the past 5 years; understands diabetes management and monitoring; and has stable control of his diabetes using insulin, and is able to drive a CMV safely. Mr. Yocum meets the requirements of the vision standard at 49 CFR 391.41(b)(10). His optometrist examined him in 2007 and certified that he does not have diabetic retinopathy. He holds a Class A CDL from Idaho.
In accordance with 49 U.S.C. 31136(e) and 31315, FMCSA requests public comment from all interested persons on the exemption petitions described in this notice. We will consider all comments received before the close of business on the closing date indicated in the dates section of the Notice.
FMCSA notes that section 4129 of the Safe, Accountable, Flexible and Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) requires the Secretary to revise its diabetes exemption program established on September 3, 2003 (68 FR 52441).
Section 4129 requires: (1) The elimination of the requirement for three years of experience operating CMVs while being treated with insulin; and (2) the establishment of a specified minimum period of insulin use to demonstrate stable control of diabetes before being allowed to operate a CMV.
In response to section 4129, FMCSA made immediate revisions to the diabetes exemption program established by the September 3, 2003 Notice. FMCSA discontinued use of the 3-year driving experience and fulfilled the requirements of section 4129 while continuing to ensure that operation of CMVs by drivers with ITDM will achieve the requisite level of safety required of all exemptions granted under 49 USC. 31136(e).
Section 4129(d) also directed FMCSA to ensure that drivers of CMVs with ITDM are not held to a higher standard than other drivers, with the exception of limited operating, monitoring and medical requirements that are deemed medically necessary.
FMCSA concluded that all of the operating, monitoring and medical requirements set out in the September 3, 2003 Notice, except as modified, were in compliance with section 4129(d). Therefore, all of the requirements set out in the September 3, 2003 Notice, except as modified by the Notice in the
Pacific Unified Railroad Corporation (PURC), a noncarrier, has filed a notice of exemption under 49 CFR 1150.31 to operate, pursuant to an agreement with Kaiser Eagle Mountain Railroad (KEM), over KEM's approximately 52-mile rail right-of-way between milepost 52.0 in Eagle Mountain and milepost 0.0 at Ferrum Junction, in Riverside County, CA.
PURC certifies that its projected annual revenues as a result of the transaction would not exceed those that would qualify it as a Class III rail carrier. The transaction is expected to be consummated no sooner than 30 days after the filing of the notice of
If the verified notice contains false or misleading information, the exemption is void
An original and 10 copies of all pleadings, referring to STB Finance Docket No. 35091, must be filed with the Surface Transportation Board, 395 E Street, SW., Washington, DC 20423-0001. In addition, a copy of each pleading must be served on Gerald Lee, Pacific Unified Railroad Corporation, 3200 West End Avenue, Suite 500, Nashville, TN 37203.
Board decisions and notices are available on our Web site at
By the Board, David M. Konschnik, Director, Office of Proceedings.
In notice document 07-5847 beginning on page 67304 in the issue of Wednesday, November 28, 2007 make the following correction:
On page 67306, in the table, in the nineteenth line, at North Carolina, second column, “64.00” should read “64.60”.
Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Treasury.
Final rule.
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the agencies) are adopting a new risk-based capital adequacy framework that requires some and permits other qualifying banks
This final rule is effective April 1, 2008.
On September 25, 2006, the agencies issued a joint notice of proposed rulemaking (proposed rule or proposal) (71 FR 55830) seeking public comment on a new risk-based regulatory capital framework for banks.
The proposed rule included the advanced capital methodologies from the New Accord, including the advanced internal ratings-based (IRB) approach for credit risk and the advanced measurement approaches (AMA) for operational risk (together, the advanced approaches). The IRB approach uses risk parameters determined by a bank's internal systems in the calculation of the bank's credit risk capital requirements. The AMA relies on a bank's internal estimates of its operational risks to generate an operational risk capital requirement for the bank.
The agencies now are adopting this final rule implementing a new risk-based regulatory capital framework, based on the New Accord, that is mandatory for some U.S. banks and optional for others. While the New Accord includes several methodologies for determining risk-based capital requirements, the agencies are adopting only the advanced approaches at this time.
The agencies received approximately 90 public comments on the proposed rule from banking organizations, trade associations representing the banking or financial services industry, supervisory authorities, and other interested parties. This section of the preamble highlights several fundamental issues that commenters raised about the agencies' proposal and briefly describes how the agencies have responded to those issues in the final rule. More detail is provided in the preamble sections below. Overall, commenters supported the development of the framework and the move to more risk-sensitive capital requirements. One overarching issue, however, was the areas where the proposal differed from the New Accord. Commenters said the divergences generally created competitive problems, raised home-host issues, entailed extra cost and regulatory burden, and did not necessarily improve the overall safety and soundness of banks subject to the rule.
Commenters also generally disagreed with the agencies' proposal to adopt only the advanced approaches from the New Accord. Further, commenters objected to the agencies' retention of the leverage ratio, the transitional arrangements in the proposal, and the 10 percent numerical benchmark for identifying material aggregate reductions in risk-based capital requirements to be used for evaluating and responding to capital outcomes during the parallel run and transitional floor periods (discussed below). Commenters also noted numerous technical issues with the proposed rule.
As noted in an interagency press release issued July 20, 2007 (
The final rule adopts without change the proposed criteria for identifying core banks (banks required to apply the advanced approaches) and continues to permit other banks (opt-in banks) to adopt the advanced approaches if they meet the applicable qualification requirements. Core banks are those with consolidated total assets (excluding assets held by an insurance underwriting subsidiary of a bank holding company) of $250 billion or more or with consolidated total on-balance-sheet foreign exposure of $10 billion or more. A depository institution (DI) also is a core bank if it is a subsidiary of another DI or bank holding company that uses the advanced approaches. The final rule also provides that a bank's primary Federal supervisor may determine that application of the final rule is not appropriate in light of the bank's asset size, level of complexity, risk profile, or scope of operations (see preamble sections II.A. and B.).
As noted above, the final rule includes only the advanced approaches. The July 2007 interagency press release stated that the agencies have agreed to issue a proposed rule that would provide non-core banks with the option to adopt an approach consistent with the standardized approach included in the New Accord. This new proposal (the standardized proposal) will replace the earlier proposal to adopt the so-called Basel IA option (Basel 1A proposal).
In response to commenters' concerns that some aspects of the proposed rule would result in excessive regulatory burden without commensurate safety and soundness enhancements, the agencies included a principle of conservatism in the final rule. In general, under this principle, in limited situations, a bank may choose not to apply a provision of the rule to one or more exposures if the bank can demonstrate on an ongoing basis to the satisfaction of its primary Federal supervisor that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure that is greater than that which would otherwise be required under the regulation, and the bank meets other specified requirements (see preamble section II.D.).
In the proposal, the agencies modified the definition of default for wholesale exposures from that in the New Accord to address issues commenters had raised on the ANPR. Commenters objected to the agencies’ modified definition of default for wholesale exposures, however, asserting that a definition different from the New Accord would result in competitive inequities and significant implementation burden without associated supervisory benefit. In response to these concerns, the agencies have adopted a definition of default for wholesale exposures that is consistent with the New Accord (see preamble section III.B.2.). For retail exposures, the final rule retains the proposed definition of default and clarifies that, subject to certain considerations, a foreign subsidiary of a U.S. bank may, in its consolidated risk-based capital calculations, use the applicable host jurisdiction definition of default for retail exposures of the foreign subsidiary in that jurisdiction (see preamble section III.B.2.).
Another concept introduced in the proposal that was not in the New Accord was the expected loss given default (ELGD) risk parameter. ELGD had four functions in the proposed rule—as a component of the calculation of expected credit loss (ECL) in the numerator of the risk-based capital ratios; in the expected loss (EL) component of the IRB risk-based capital formulas; as a floor on the value of the loss given default (LGD) risk parameter; and as an input into a supervisory mapping function. Many commenters objected to the inclusion of ELGD as a departure from the New Accord that would create regulatory burden and competitive inequity. Many commenters also objected to the supervisory mapping function, which the agencies intended as an alternative for banks that were not able to estimate reliably the LGD risk parameter. The agencies have eliminated ELGD from the final rule. Banks are required to estimate only the LGD risk parameter, which reflects economic downturn conditions (see preamble section III.B.3.). The supervisory mapping function also has been eliminated from the rule.
Commenters also objected to the agencies’ decision not to include a distinct risk weight function for exposures to small- and medium-size enterprises (SMEs) as provided in the New Accord. In the proposal, the agencies noted they were not aware of compelling evidence that smaller firms with the same probability of default (PD) and LGD as larger firms are subject to less systemic risk than is already reflected in the wholesale risk-based capital functions. The agencies continue to believe an SME-specific risk weight function is not supported by sufficient evidence and might give rise to competitive inequities across U.S. banks, and have not adopted such a function in the final rule (see preamble section V.A.1.)
With regard to the proposed treatment for securitization exposures, commenters raised a number of technical issues. Many objected to the proposed definition of a securitization exposure, which included exposures to investment funds with material liabilities (including exposures to hedge funds). The agencies agree with commenters that the proposed definition for securitization exposures was quite broad and captured some exposures that would more appropriately be treated under the wholesale or equity frameworks. To limit the scope of the IRB securitization framework, the agencies have modified the definition of traditional securitization in the final rule as described in preamble section V.A.3. Technical issues related to securitization exposures are discussed in preamble sections V.A.3. and V.E.
For equity exposures, commenters focused on the proposal's lack of a grandfathering period. The New Accord provides national discretion for each implementing jurisdiction to adopt a grandfather period for equity exposures. Commenters asserted that this omission would result in competitive inequity for U.S. banks as compared to other internationally active institutions. The agencies believe that, overall, the proposal's approach to equity exposures results in a competitive risk-based capital requirement. The final rule does not include a grandfathering provision, and the agencies have adopted the proposed treatment for equity exposures without significant change (see preamble section V.F.).
A number of commenters raised issues related to operational risk. Most significantly, commenters noted that activities besides securities processing and credit card fraud have highly predictable and reasonably stable losses and should be considered for operational risk offsets. The agencies believe that the proposed definition of
Many commenters expressed concern that the proposed public disclosures were excessive and would hinder, rather than facilitate, market discipline by requiring banks to disclose information that would not be well understood by or useful to the market. Commenters also expressed concern about possible disclosure of proprietary information. The agencies believe that it is important to retain the vast majority of the proposed disclosures, which are consistent with the New Accord. These disclosures will enable market participants to gain key insights regarding a bank's capital structure, risk exposures, risk assessment processes, and, ultimately, capital adequacy. The agencies have modified the final rule to provide flexibility regarding proprietary information.
This final rule is intended to produce risk-based capital requirements that are more risk-sensitive than those produced under the agencies’ existing risk-based capital rules (general risk-based capital rules). In particular, the IRB approach requires banks to assign risk parameters to wholesale exposures and retail segments and provides specific risk-based capital formulas that must be used to transform these risk parameters into risk-based capital requirements.
The framework is based on “value-at-risk” (VaR) modeling techniques that measure credit risk and operational risk. Because bank risk measurement practices are both continually evolving and subject to uncertainty, the framework should be viewed as an effort to improve the risk sensitivity of the risk-based capital requirements for banks, rather than as an effort to produce a statistically precise measurement of risk.
The framework's conceptual foundation is based on the view that risk can be quantified through the estimation of specific characteristics of the probability distribution of potential losses over a given time horizon. This approach assumes that a suitable estimate of that probability distribution, or at least of the specific characteristics to be measured, can be produced. Figure 1 illustrates some of the key concepts associated with the framework. The figure shows a probability distribution of potential losses associated with some time horizon (for example, one year). It could reflect, for example, credit losses, operational losses, or other types of losses.
The area under the curve to the right of a particular loss amount is the probability of experiencing losses exceeding this amount within a given time horizon. The figure also shows the statistical mean of the loss distribution, which is equivalent to the amount of loss that is “expected” over the time horizon. The concept of “expected loss” (EL) is distinguished from that of “unexpected loss” (UL), which represents potential losses over and above the EL amount. A given level of UL can be defined by reference to a particular percentile threshold of the probability distribution. For example, in the figure UL is measured at the 99.9th percentile level and thus is equal to the value of the loss distribution corresponding to the 99.9th percentile, less the amount of EL. This is shown graphically at the bottom of the figure.
The particular percentile level chosen for the measurement of UL is referred to as the “confidence level” or the “soundness standard” associated with the measurement. If capital is available to cover losses up to and including this percentile level, then the bank should remain solvent in the face of actual losses of that magnitude. Typically, the choice of confidence level or soundness standard reflects a very high percentile level, so that there is a very low estimated probability that actual losses would exceed the UL amount associated with that confidence level or soundness standard.
Assessing risk and assigning regulatory capital requirements by reference to a specific percentile of a probability distribution of potential losses is commonly referred to as a VaR approach. Such an approach was adopted by the FDIC, Board, and OCC for assessing a bank's risk-based capital requirements for market risk in 1996 (market risk rule). Under the market risk
The conceptual foundation of this final rule's approach to credit risk capital requirements is similar to the market risk rule's approach to market risk capital requirements, in the sense that each is VaR-oriented. Nevertheless, there are important differences between the IRB approach and the market risk rule. The current market risk rule specifies a nominal confidence level of 99.0 percent and a ten-business-day horizon, but otherwise provides banks with substantial modeling flexibility in determining their market risk loss distribution and capital requirements. In contrast, the IRB approach for assessing credit risk capital requirements is based on a 99.9 percent nominal confidence level, a one-year horizon, and a supervisory model of credit losses embodying particular assumptions about the underlying drivers of portfolio credit risk, including loss correlations among different asset types.
The IRB approach is broadly similar to the credit VaR approaches used by a number of banks as the basis for their internal assessment of the economic capital necessary to cover credit risk. It is common for a bank's internal credit risk models to consider a one-year loss horizon and to focus on a high loss threshold confidence level. As with the internal credit VaR models used by banks, the output of the risk-based capital formulas in the IRB approach is an estimate of the amount of credit losses above ECL over a one-year horizon that would only be exceeded a small percentage of the time. The agencies believe that a one-year horizon is appropriate because it balances the difficulty of easily or rapidly exiting non-trading positions against the possibility that in many cases a bank can cover credit losses by raising additional capital should the underlying credit problems manifest themselves gradually. The nominal confidence level of the IRB risk-based capital formulas (99.9 percent) means that if all the assumptions in the IRB supervisory model for credit risk were correct for a bank, there would be less than a 0.1 percent probability that credit losses at the bank in any year would exceed the IRB risk-based capital requirement.
As noted above, the supervisory model of credit risk underlying the IRB approach embodies specific assumptions about the economic drivers of portfolio credit risk at banks. As with any modeling approach, these assumptions represent simplifications of very complex real-world phenomena and, at best, are only an approximation of the actual credit risks at any bank. If these assumptions (described in greater detail below) are incorrect or otherwise do not characterize a given bank precisely, the actual confidence level implied by the IRB risk-based capital formulas may exceed or fall short of a true 99.9 percent confidence level.
In combination with other supervisory assumptions and parameters underlying the IRB approach, the approach's 99.9 percent nominal confidence level reflects a judgmental pooling of available information, including supervisory experience. The framework underlying this final rule reflects a desire on the part of the agencies to achieve (i) risk-based capital requirements that are reflective of relative risk across different assets and that are broadly consistent with maintaining at least an investment-grade rating (for example, at least BBB) on the liabilities funding those assets, even in periods of economic adversity; and (ii) for the U.S. banking system as a whole, aggregate minimum regulatory capital requirements that are not a material reduction from the aggregate minimum regulatory capital requirements under the general risk-based capital rules.
A number of important explicit general assumptions and specific parameters are built into the IRB approach to make the framework applicable to a range of banks and to obtain tractable information for calculating risk-based capital requirements. Chief among the assumptions embodied in the IRB approach are: (i) Assumptions that a bank's credit portfolio is infinitely granular; (ii) assumptions that loan defaults at a bank are driven by a single, systematic risk factor; (iii) assumptions that systematic and non-systematic risk factors are log-normal random variables; and (iv) assumptions regarding correlations among credit losses on various types of assets.
The specific risk-based capital formulas in this final rule require the bank to estimate certain risk parameters for its wholesale and retail exposures, which the bank may do using a variety of techniques. These risk parameters are PD, LGD, exposure at default (EAD), and, for wholesale exposures, effective remaining maturity (M). The proposed rule included an additional risk parameter, ELGD. As discussed in section III.B.3. of the preamble, the agencies have eliminated the ELGD risk parameter from the final rule. The risk-based capital formulas into which the estimated risk parameters are inserted are simpler than the economic capital methodologies typically employed by banks, which often require complex computer simulations. In particular, an important property of the IRB risk-based capital formulas is portfolio invariance. That is, the risk-based capital requirement for a particular exposure generally does not depend on the other exposures held by the bank. Like the general risk-based capital rules, the total credit risk capital requirement for a bank's wholesale and retail exposures is the sum of the credit risk capital requirements on individual wholesale exposures and segments of retail exposures.
The IRB risk-based capital formulas contain supervisory asset value correlation (AVC) factors, which have a significant impact on the capital requirements generated by the formulas. The AVC assigned to a given portfolio of exposures is an estimate of the degree to which any unanticipated changes in the financial conditions of the underlying obligors of the exposures are correlated (that is, would likely move up and down together). High correlation of exposures in a period of economic downturn conditions is an area of supervisory concern. For a portfolio of exposures having the same risk parameters, a larger AVC implies less
The AVCs that appear in the IRB risk-based capital formulas for wholesale exposures decline with increasing PD; that is, the IRB risk-based capital formulas generally imply that a group of low-PD wholesale exposures are more correlated than a group of high-PD wholesale exposures. Thus, under the rule, a low-PD wholesale exposure would have a higher relative risk-based capital requirement than that implied by its PD were the AVC in the IRB risk-based capital formulas for wholesale exposures fixed rather than a decreasing function of PD. The AVCs included in the IRB risk-based capital formulas for both wholesale and retail exposures reflect a combination of supervisory judgment and empirical evidence.
Several commenters stated that the proposed AVCs for wholesale exposures were too high in general, and a few claimed that, in particular, the AVCs for multi-family residential real estate exposures should be lower. Other commenters suggested that the AVCs of wholesale exposures should be a function of obligor size rather than PD. Similarly, several commenters maintained that the proposed AVCs for retail exposures were too high. Some of these commenters suggested that the AVCs for qualifying revolving exposures (QREs), such as credit cards, should be in the range of 1 to 2 percent, not 4 percent as proposed. Similarly, some of those commenters opposed the proposed flat 15 percent AVC for residential mortgage exposures; one commenter suggested that the agencies should consider employing lower AVCs for home equity loans and lines of credit (HELOCs) to take into account their shorter maturity relative to traditional mortgage exposures.
However, most commenters recognized that the proposed AVCs were consistent with those in the New Accord and recommended that the agencies use the AVCs contained in the New Accord to avoid international competitive inequity and unnecessary burden. Several commenters suggested that the agencies should reconsider the AVCs going forward, working with the BCBS.
The agencies agree with the prevailing view of the commenters that using the AVCs in the New Accord alleviates a potential source of international inconsistency and implementation burden. The final rule therefore maintains the proposed AVCs. As the agencies gain more experience with the advanced approaches, they may revisit the AVCs for wholesale exposures and retail exposures, along with other calibration issues identified during the parallel run and transitional floor periods (as described below) and make changes to the rule as necessary. The agencies would address this issue working with the BCBS and other supervisory and regulatory authorities, as appropriate.
Another important conceptual element of the IRB approach concerns the treatment of ECL. The IRB approach assumes that reserves should cover ECL while capital should cover credit losses exceeding ECL (that is, unexpected credit losses). Accordingly, the final rule, consistent with the proposal and the New Accord, removes ECL from the risk-weighted assets calculation but requires a bank to compare its ECL to its eligible credit reserves (as defined below). If a bank's ECL exceeds its eligible credit reserves, the bank must deduct the excess ECL amount 50 percent from tier 1 capital and 50 percent from tier 2 capital. If a bank's eligible credit reserves exceed its ECL, the bank may include the excess eligible credit reserves amount in tier 2 capital, up to 0.6 percent of the bank's credit risk-weighted assets.
In developing the New Accord, the BCBS sought broadly to maintain the current overall level of minimum risk-based capital requirements within the banking system. Using data from QIS-3, the BCBS conducted an analysis of the risk-based capital requirements that would be generated under the New Accord. Based on this analysis, the BCBS concluded that a “scaling factor” (multiplier) should apply to credit risk-weighted assets. The BCBS, in the New Accord, indicated that the best estimate of the scaling factor was 1.06. In May 2006, the BCBS decided to maintain the 1.06 scaling factor based on the results of a fourth quantitative impact study (QIS-4) conducted in some jurisdictions, including the United States, and a fifth quantitative impact study (QIS-5), not conducted in the United States.
The agencies generally agree with the BCBS regarding calibration of the New Accord. Therefore, consistent with the New Accord and the proposed rule, the final rule contains a scaling factor of 1.06 for credit-risk-weighted assets. As the agencies gain more experience with the advanced approaches, the agencies will revisit the scaling factor along with other calibration issues identified during the parallel run and transitional floor periods (described below) and will make changes to the rule as necessary, working with the BCBS and other supervisory and regulatory authorities, as appropriate.
The final rule also includes the AMA for determining risk-based capital requirements for operational risk. Under the final rule (consistent with the proposed rule), operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events. This definition of operational risk includes legal risk—which is the risk of loss (including litigation costs,
Under the AMA, a bank must use its internal operational risk management systems and processes to assess its exposure to operational risk. Given the complexities involved in measuring operational risk, the AMA provides banks with substantial flexibility and, therefore, does not require a bank to use specific methodologies or distributional assumptions. Nevertheless, a bank using the AMA must demonstrate to the satisfaction of its primary Federal supervisor that its systems for managing and measuring operational risk meet established standards, including producing an estimate of operational risk exposure that meets a one-year, 99.9th percentile soundness standard. A bank's estimate of operational risk exposure includes both expected operational loss (EOL) and unexpected operational loss (UOL) and forms the basis of the bank's risk-based capital requirement for operational risk.
The AMA allows a bank to base its risk-based capital requirement for operational risk on UOL alone if the bank can demonstrate to the satisfaction of its primary Federal supervisor that the bank has eligible operational risk offsets, such as certain operational risk reserves, that equal or exceed the bank's EOL. To the extent that eligible operational risk offsets are less than EOL, the bank's risk-based capital requirement for operational risk must incorporate the shortfall.
The final rule maintains the general risk-based capital rules' minimum tier 1 risk-based capital ratio of 4.0 percent and total risk-based capital ratio of 8.0 percent. The components of tier 1 and total capital in the final rule are also the same as in the general risk-based capital rules, with a few adjustments described in more detail below. The primary difference between the general risk-based capital rules and the final rule is the methodologies used for calculating risk-weighted assets. Banks applying the final rule generally must use their internal risk measurement systems to calculate the inputs for determining the risk-weighted asset amounts for (i) general credit risk (including wholesale and retail exposures); (ii) securitization exposures; (iii) equity exposures; and (iv) operational risk. In certain cases, however, banks must use external ratings or supervisory risk weights to determine risk-weighted asset amounts. Each of these areas is discussed below.
Banks using the final rule also are subject to supervisory review of their capital adequacy (Pillar 2) and certain public disclosure requirements to foster transparency and market discipline (Pillar 3). In addition, each bank using the advanced approaches remains subject to the tier 1 leverage ratio requirement,
Under the final rule, a bank must identify whether each of its on- and off-balance sheet exposures is a wholesale, retail, securitization, or equity exposure. Assets that are not defined by any exposure category (and certain immaterial portfolios of exposures) generally are assigned risk-weighted asset amounts equal to their carrying value (for on-balance sheet exposures) or notional amount (for off-balance sheet exposures).
Wholesale exposures under the final rule include most credit exposures to companies, sovereigns, and other governmental entities. For each wholesale exposure, a bank must assign four quantitative risk parameters: PD (which is expressed as a decimal (that is, 0.01 corresponds to 1 percent) and is an estimate of the probability that an obligor will default over a one-year horizon); LGD (which is expressed as a decimal and reflects an estimate of the economic loss rate if a default occurs during economic downturn conditions); EAD (which is measured in dollars and is an estimate of the amount that would be owed to the bank at the time of default); and M (which is measured in years and reflects the effective remaining maturity of the exposure). Banks may factor into their risk parameter estimates the risk mitigating impact of collateral, credit derivatives, and guarantees that meet certain criteria. Banks must input the risk parameters for each wholesale exposure into an IRB risk-based capital formula to determine the risk-based capital requirement for the exposure.
Retail exposures under the final rule include most credit exposures to individuals and small credit exposures to businesses that are managed as part of a segment of exposures with similar risk characteristics and not managed on an individual-exposure basis. A bank must classify each of its retail exposures into one of three retail subcategories—residential mortgage exposures; QREs, such as credit cards and overdraft lines; and other retail exposures. Within these three subcategories, the bank must group exposures into segments with similar risk characteristics. The bank must then assign the risk parameters PD, LGD, and EAD to each retail segment. The bank may take into account the risk mitigating impact of collateral and guarantees in the segmentation process and in the assignment of risk parameters to retail segments. Like wholesale exposures, the risk parameters for each retail segment are used as inputs into an IRB risk-based capital formula to determine the risk-based capital requirement for the segment.
For securitization exposures, the bank must apply one of three general approaches, subject to various conditions and qualifying criteria: the Ratings-Based Approach (RBA), which uses external ratings to risk-weight exposures; the Internal Assessment Approach (IAA), which uses internal ratings to risk-weight exposures to asset-backed commercial paper programs (ABCP programs); or the Supervisory Formula Approach (SFA), which uses bank inputs that are entered into a supervisory formula to risk-weight exposures. Securitization exposures in the form of gain-on-sale or credit-enhancing interest-only strips (CEIOs)
Banks may use an internal models approach (IMA) for determining risk-based capital requirements for equity exposures, subject to certain qualifying criteria and floors. If a bank does not have a qualifying internal model for equity exposures, or chooses not to use such a model, the bank must apply a simple risk weight approach (SRWA) in which publicly traded equity exposures
Banks must develop qualifying AMA systems to determine risk-based capital requirements for operational risk. Under the AMA, a bank must use its own methodology to identify operational loss events, measure its exposure to operational risk, and assess a risk-based capital requirement for operational risk.
Under the final rule, a bank must calculate its tier 1 and total risk-based capital ratios by dividing tier 1 capital by total risk-weighted assets and by dividing total qualifying capital by total risk-weighted assets, respectively. To calculate total risk-weighted assets, a bank must first convert the dollar risk-based capital requirements for exposures produced by the IRB risk-based capital approaches and the AMA into risk-weighted asset amounts by multiplying the capital requirements by 12.5 (the inverse of the overall 8.0 percent risk-based capital requirement). After determining the risk-weighted asset amounts for credit risk and operational risk, a bank must sum these amounts and then subtract any excess eligible credit reserves not included in tier 2 capital to determine total risk-weighted assets.
The final rule contains specific public disclosure requirements to provide important information to market participants on the capital structure, risk exposures, risk assessment processes, and, hence, the capital adequacy of a bank. The public disclosure requirements apply only to the DI or bank holding company representing the top consolidated level of the banking group that is subject to the advanced approaches, unless the entity is a subsidiary of a non-U.S. banking organization that is subject to comparable disclosure requirements in its home jurisdiction. All banks subject to the rule, however, must disclose total and tier 1 risk-based capital ratios and the components of these ratios. The agencies also proposed a package of regulatory reporting templates for the agencies' use in assessing and monitoring the levels and components of bank risk-based capital requirements under the advanced approaches.
The agencies are aware that the fair value option in generally accepted accounting principles as used in the United States (GAAP) raises potential risk-based capital issues not contemplated in the development of the New Accord. The agencies will continue to analyze these issues and may make changes to this rule at a future date as necessary. The agencies would address these issues working with the BCBS and other supervisory and regulatory authorities, as appropriate.
The agencies are implementing a regulatory framework for the advanced approaches in which each agency has an advanced approaches appendix that incorporates (i) definitions of tier 1 and tier 2 capital and associated adjustments to the risk-based capital ratio numerators, (ii) the qualification requirements for using the advanced approaches, and (iii) the details of the advanced approaches.
In this final rule, as in the proposed rule, the agencies are not restating the elements of tier 1 and tier 2 capital, which largely remain the same as under the general risk-based capital rules. Adjustments to the risk-based capital ratio numerators specific to banks applying the final rule are in part II of the rule and explained in greater detail in section IV of this preamble.
The final rule has eight parts. Part I identifies criteria for determining which banks are subject to the rule, provides key definitions, and sets forth the minimum risk-based capital ratios. Part II describes the adjustments to the numerator of the regulatory capital ratios for banks using the advanced approaches. Part III describes the qualification process and provides qualification requirements for obtaining supervisory approval for use of the advanced approaches. This part incorporates critical elements of supervisory oversight of capital adequacy (Pillar 2).
Parts IV through VII address the calculation of risk-weighted assets. Part IV provides the risk-weighted assets calculation methodologies for wholesale and retail exposures; on-balance sheet assets that do not meet the regulatory definition of a wholesale, retail, securitization, or equity exposure; and certain immaterial portfolios of credit exposures. This part also describes the risk-based capital treatment for over-the-counter (OTC) derivative contracts, repo-style transactions, and eligible margin loans. In addition, this part describes the methodologies for reflecting credit risk mitigation in risk-weighted assets for wholesale and retail exposures. Furthermore, this part sets forth the risk-based capital requirements for failed and unsettled securities, commodities, and foreign exchange transactions.
Part V identifies operating criteria for recognizing risk transference in the securitization context and outlines the approaches for calculating risk-weighted assets for securitization exposures. Part VI describes the approaches for calculating risk-weighted assets for equity exposures. Part VII describes the calculation of risk-weighted assets for operational risk. Finally, Part VIII provides public disclosure requirements for banks employing the advanced approaches (Pillar 3).
The structure of the preamble generally follows the structure of the regulatory text. Definitions, however, are discussed in the portions of the preamble where they are most relevant.
The preamble to the proposed rule described the agencies’ intention to avoid a material reduction in overall risk-based capital requirements under the advanced approaches. The agencies also identified other objectives, such as ensuring that differences in capital requirements appropriately reflect differences in risk and ensuring that the U.S. implementation of the New Accord will not be a significant source of competitive inequity among internationally active banks or among domestic banks operating under different risk-based capital rules. The final rule modifies and clarifies the approach the agencies will use to achieve these objectives.
The agencies proposed a series of transitional floors to provide a smooth transition to the advanced approaches and to temporarily limit the amount by which a bank's risk-based capital requirements could decline over a period of at least three years. The transitional floors are described in more detail in section III.A.2. of this preamble. The floors generally prohibit a bank's risk-based capital requirement under the advanced approaches from falling below 95 percent, 90 percent, and 85 percent of what it would be under the general risk-based capital
The preamble to the proposal noted that if there was a material reduction in aggregate minimum regulatory capital upon implementation of the advanced approaches, the agencies would propose regulatory changes or adjustments during the transitional floor periods. The preamble further noted that in this context, materiality would depend on a number of factors, including the size, source, and nature of any reduction; the risk profiles of banks authorized to use the advanced approaches; and other considerations relevant to the maintenance of a safe and sound banking system. The agencies also stated that they would view a 10 percent or greater decline in aggregate minimum required risk-based capital (without reference to the effects of the transitional floors), compared to minimum required risk-based capital as determined under the general risk-based capital rules, as a material reduction warranting modification to the supervisory risk functions or other aspects of the framework.
Further, the agencies stated that they were “identifying a numerical benchmark for evaluating and responding to capital outcomes during the parallel run and transitional floor periods that do not comport with the overall capital objectives.” The agencies also stated that “[a]t the end of the transitional floor periods, the agencies would reevaluate the consistency of the framework, as (possibly) revised during the transitional floor periods, with the capital goals outlined in the ANPR and with the maintenance of broad competitive parity between banks adopting the framework and other banks, and would be prepared to make further changes to the framework if warranted.” The agencies viewed the parallel run and transitional floor periods as “a trial of the new framework under controlled conditions.”
The agencies sought comment on the appropriateness of using a 10 percent or greater decline in aggregate minimum required risk-based capital as a numerical benchmark for material reductions when determining whether capital objectives were achieved. Many commenters objected to the proposed transitional floors and the 10 percent benchmark on the grounds that both safeguards deviated materially from the New Accord and the rules implemented by foreign supervisory authorities. In particular, commenters expressed concerns that the aggregate 10 percent limit added a degree of uncertainty to their capital planning process, since the limit was beyond the control of any individual bank. They maintained that it might take only a few banks that decided to reallocate funds toward lower-risk activities during the transition period to impose a penalty on all U.S. banks using the advanced approaches. Other commenters stated that the benchmark lacked transparency and would be operationally difficult to apply.
Commenters also criticized the duration, level, and construct of the transitional floors in the proposed rule. Commenters believed it was inappropriate to extend the transitional floors by an additional year (to three years), and raised concerns that the floors were more binding than those proposed in the New Accord. Commenters strongly urged the agencies to adopt the transition periods and floors in the New Accord to limit any competitive inequities that could arise among internationally active banks.
To better balance commenters’ concerns and the agencies' capital adequacy objectives, the agencies have decided not to include the 10 percent benchmark language in this preamble. This will alleviate uncertainty and enable each bank to develop capital plans in accordance with its individual risk profile and business model. The agencies have taken a number of steps to address their capital adequacy objectives. Specifically, the agencies are retaining the existing leverage ratio and PCA requirements and are adopting the three transitional floor periods at the proposed numerical levels.
Under the final rule, the agencies will jointly evaluate the effectiveness of the new capital framework. The agencies will issue a series of annual reports during the transition period that will provide timely and relevant information on the implementation of the advanced approaches. In addition, after the end of the second transition year, the agencies will publish a study (interagency study) that will evaluate the advanced approaches to determine if there are any material deficiencies. For any primary Federal supervisor to authorize any bank to exit the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools, or, if such deficiencies are found, they must be first remedied by changes to regulation. Notwithstanding the preceding sentence, a primary Federal supervisor that disagrees with the finding of material deficiency may not authorize a bank under its jurisdiction to exit the third transitional floor period unless the supervisor first provides a public report explaining its reasoning.
The agencies intend to establish a transparent and collaborative process for conducting the interagency study, consistent with the recommendations made by the U.S. Government Accountability Office (GAO) in its report on implementation of the New Accord in the United States.
• The level of minimum required regulatory capital under U.S. advanced approaches compared to the capital required by other international and domestic regulatory capital standards.
• Peer comparisons of minimum regulatory capital requirements, including but not limited to banks' estimates of risk parameters for portfolios of similar risk.
• The processes banks use to develop and assess risk parameters and advanced systems, and supervisory assessments of their accuracy and reliability.
• Potential cyclical implications.
• Changes in portfolio composition or business mix, including those that might result in changes in capital requirements per dollar of credit exposure.
• Comparison of regulatory capital requirements to market-based measures of capital adequacy to assess relative minimum capital requirements across banks and broad asset categories. Market-based measures might include credit default swap spreads, subordinated debt spreads, external rating agency ratings, and other market measures of risk.
• Examination of the quality and robustness of advanced risk management processes related to assessment of capital adequacy, as in the comprehensive supervisory assessments performed under Pillar 2.
• Additional reviews, including analysis of interest rate and concentration risks that might suggest the need for higher regulatory capital requirements.
A fundamental objective of the New Accord is to strengthen the soundness
While all banks should work to enhance their risk management practices, the advanced approaches and the systems required to support their use may not be appropriate for many banks from a cost-benefit point of view. For a number of banks, the agencies believe that the general risk-based capital rules continue to provide a reasonable alternative for regulatory risk-based capital measurement purposes. However, the agencies recognize that a bifurcated risk-based capital framework inevitably raises competitive considerations. The agencies have received comments on risk-based capital proposals issued in the past several years
The agencies recognize the potential competitive inequities associated with a bifurcated risk-based capital framework. As part of their effort to develop a risk-based capital framework that minimizes competitive inequities and is not disruptive to the banking sector, the agencies issued the Basel IA proposal in December 2006. The Basel IA proposal included modifications to the general risk-based capital rules to improve risk sensitivity and to reduce potential competitive disparities between domestic banks subject to the advanced approaches and domestic banks not subject to the advanced approaches. Recognizing that some banks might prefer not to incur the additional regulatory burden of moving to modified capital rules, the Basel IA proposal retained the existing general risk-based capital rules and permitted banks to opt in to the modified rules. The agencies extended the comment period for the advanced approaches proposal to coincide with the comment period on the Basel IA proposal so that commenters would have an opportunity to analyze the effects of the two proposals concurrently.
Seeking to minimize potential competitive inequities and regulatory burden, a number of commenters on both the advanced approaches proposal and the Basel IA proposal urged the agencies to adopt all of the approaches included in the New Accord—including the foundation IRB and standardized approaches for credit risk and the standardized and basic indicator approaches for operational risk. In response to these comments, the agencies have decided to issue a new standardized proposal, which would replace the Basel IA proposal for banks that do not apply the advanced approaches. The standardized proposal would allow banks that are not core banks to implement a standardized approach for credit risk and an approach to operational risk consistent with the New Accord. Like the Basel IA proposal, the standardized proposal will retain the existing general risk-based capital rules for those banks that do not wish to move to the new rules. The agencies expect to issue the standardized proposal in the first quarter of 2008.
A number of commenters expressed concern about competitive inequities among internationally active banks arising from differences in implementation and application of the New Accord by supervisory authorities in different countries. In particular, some commenters asserted that the proposed U.S. implementation would be different from other countries in a number of key areas, such as the definition of default, and that these differences would give rise to substantial implementation cost and burden. Other commenters continued to raise concern about the delayed implementation schedule in the United States.
As discussed in more detail throughout this preamble, the agencies have made a number of changes from the proposal to conform the final rule more closely to the New Accord. These changes should help minimize regulatory burden and mitigate potential competitive inequities across national jurisdictions. In addition, the BCBS has established an Accord Implementation Group, comprised of supervisors from member countries, whose primary objectives are to work through implementation issues, maintain a constructive dialogue about implementation processes, and harmonize approaches as much as possible within the range of national discretion embedded in the New Accord. The BCBS also has established a Capital Interpretation Group to foster consistency in applying the New Accord on an ongoing basis. The agencies intend to participate fully in these groups to ensure that issues relating to international implementation and competitive effects are addressed. While supervisory judgment will play a critical role in the evaluation of risk measurement and management practices at individual banks, supervisors remain committed to and have made significant progress toward developing protocols and information-sharing arrangements that should minimize burdens on banks operating in multiple countries and ensure that supervisory authorities are implementing the New Accord as consistently as possible.
With regard to implementation timing concerns, the agencies believe that the transitional arrangements described in preamble section III.A.2. below provide a prudent and reasonable framework for moving to the advanced approaches. Where international implementation differences affect an individual bank, the agencies are working with the bank and appropriate national supervisory authorities to ensure that implementation proceeds as efficiently as possible.
The agencies have identified three groups of banks: (i) Large or internationally active banks that are required to adopt the advanced approaches (core banks); (ii) banks that voluntarily decide to adopt the advanced approaches (opt-in banks); and (iii) banks that do not adopt the advanced approaches (general banks). Each core and opt-in bank is required to meet certain qualification requirements to the satisfaction of its primary Federal supervisor, which in turn will consult with other relevant supervisors, before the bank may use the advanced approaches for risk-based capital purposes.
Pillar 1 of the New Accord requires all banks subject to the New Accord to calculate capital requirements for exposure to credit risk and operational risk. The New Accord sets forth three approaches to calculating the credit risk capital requirement and three approaches to calculating the operational risk capital requirement. Outside the United States, countries that are replacing Basel I with the New
For banks in the United States, the agencies have taken a different approach. This final rule focuses on the largest and most internationally active banks and requires those banks to comply with the most advanced approaches for calculating credit and operational risk capital requirements (the IRB and the AMA). The final rule allows other U.S. banks to “opt in” to the advanced approaches. The agencies have decided at this time to require large, internationally active U.S. banks to use the most advanced approaches of the New Accord. The less advanced approaches of the New Accord lack the degree of risk sensitivity of the advanced approaches. The agencies have the view that risk-sensitive regulatory capital requirements are integral to ensuring that large, sophisticated banks and the financial system have an adequate capital cushion to absorb financial losses. Also, the advanced approaches provide more substantial incentives for banks to improve their risk measurement and management practices than do the other approaches. The agencies do not believe that competitive equity concerns are sufficiently compelling to warrant permitting large, internationally active U.S. banks to adopt the standardized approaches in the New Accord.
Under section 1(b) of the proposed rule, a DI would be a core bank if it met either of two independent threshold criteria: (i) Consolidated total assets of $250 billion or more, as reported on the most recent year-end regulatory reports; or (ii) consolidated total on-balance sheet foreign exposure of $10 billion or more at the most recent year end. To determine total on-balance sheet foreign exposure, a bank would sum its adjusted cross-border claims, local country claims, and cross-border revaluation gains calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) Country Exposure Report (FFIEC 009). Adjusted cross-border claims would equal total cross-border claims less claims with the head office or guarantor located in another country, plus redistributed guaranteed amounts to the country of head office or guarantor. The agencies also proposed that a DI would be a core bank if it is a subsidiary of another DI or BHC that uses the advanced approaches.
Under the proposed rule, a U.S.-chartered BHC
The agencies included a question in the proposal seeking commenters’ views on using consolidated total assets (excluding assets held by an insurance underwriting subsidiary) as one criterion to determine whether a BHC would be viewed as a core BHC. Some of the commenters addressing this issue supported the proposed approach, noting it was a reasonable proxy for mandatory applicability of a framework designed to measure capital requirements for consolidated risk exposures of a BHC. Other commenters, particularly foreign banking organizations and their trade associations, contended that the BHC asset size threshold criterion instead should be $250 billion of assets in U.S. subsidiary DIs. These commenters further suggested that if the Board kept the proposed $250 billion consolidated total BHC assets criterion, it should limit the scope of this criterion to BHCs with a majority of their assets in U.S. DI subsidiaries. The Board has decided to retain the proposed approach using consolidated total assets (excluding assets held by an insurance underwriting subsidiary) as one threshold criterion for BHCs in this final rule. This approach recognizes that BHCs can hold similar assets within and outside of DIs and reduces potential incentives to structure BHC assets and activities to arbitrage capital regulations. The final rule continues to exclude assets held in an insurance underwriting subsidiary of a BHC from the asset threshold because the advanced approaches were not designed to address insurance underwriting exposures.
The final rule also retains the threshold criterion for core bank/BHC status of consolidated total on-balance sheet foreign exposure of $10 billion or more at the most recent year-end. The calculation of this exposure amount is unchanged in the final rule.
In the preamble to the proposed rule, the agencies also included a question on potential regulatory burden associated with requiring a bank that applies the advanced approaches to implement the advanced approaches at each subsidiary DI—even if those subsidiary DIs do not individually meet a threshold criterion. A number of commenters addressed this issue. While they expressed a range of views, most commenters maintained that small DI subsidiaries of core banks should not be required to implement the advanced approaches. Rather, commenters asserted that these DIs should be permitted to use simpler methodologies, such as the New Accord's standardized approach. Commenters asserted there would be regulatory burden and costs associated with the proposed push-down approach, particularly if a stand-alone AMA is required at each DI.
The agencies have considered comments on this issue and have decided to retain the proposed approach. Thus, under the final rule, each DI subsidiary of a core or opt-in bank is itself a core bank required to apply the advanced approaches. The agencies believe that this approach serves as an important safeguard against regulatory capital arbitrage among affiliated banks that would otherwise be subject to substantially different capital rules. Moreover, to calculate its consolidated IRB risk-based capital requirements, a bank must estimate risk parameters for all credit exposures within the bank except for exposures in portfolios that, in the aggregate, are immaterial to the bank. Because the consolidated bank must already estimate risk parameters for all material portfolios of wholesale and retail exposures in all of its consolidated subsidiaries, the agencies believe that there is limited additional regulatory burden associated with application of the IRB approach at each subsidiary DI. Likewise, to calculate its consolidated AMA risk-based capital requirements, a bank must estimate its operational risk exposure using a unit of measure (defined below) that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution. Each subsidiary DI could have a demonstrably different risk profile that would require the generation of separate loss distributions.
However, the agencies recognize there may be situations where application of the advanced approaches at an individual DI subsidiary of an advanced approaches bank may not be appropriate. Therefore, the final rule includes the proposed provision that
Under the proposed rule, any U.S.-chartered DI that is a subsidiary of a foreign banking organization would be subject to the U.S. regulatory capital requirements for domestically-owned U.S. DIs. Thus, if the U.S. DI subsidiary of a foreign banking organization met any of the threshold criteria, it would be a core bank and would be subject to the advanced approaches. If it did not meet any of the criteria, the U.S. DI could remain a general bank or could opt in to the advanced approaches, subject to the same qualification process and requirements as a domestically-owned U.S. DI.
The proposed rule also provided that a top-tier U.S. BHC, and its subsidiary DIs, that was owned by a foreign banking organization would be subject to the same threshold levels for core bank determination as a top-tier BHC that is not owned by a foreign banking organization.
Under the final rule, consistent with SR 01-01, a foreign-owned U.S. BHC that is a core bank and that also is subject to SR 01-01 will, as a technical matter, be required to adopt the advanced approaches, and compute and report its capital ratios and make other required disclosures. It will not, however, be required to maintain the minimum capital ratios at the U.S. consolidated holding company level unless otherwise required to do so by the Board. In response to the potential burden issues identified by commenters and outlined above, the Board notes that the final rule allows the Board to exempt any BHC from mandatory application of the advanced approaches. The Board will make such a determination in light of the BHC's asset size (including subsidiary DI asset size relative to total BHC asset size), level of complexity, risk profile, or scope of operation. Similarly, the final rule allows a primary Federal supervisor to exempt any DI under its jurisdiction from mandatory application of the advanced approaches. A primary Federal supervisor will consider the same factors in making its determination.
The proposed rule restated the authority of a bank's primary Federal supervisor to require a bank to hold an overall amount of capital greater than would otherwise be required under the rule if the agency determined that the bank's risk-based capital requirements were not commensurate with the bank's credit, market, operational, or other risks. In addition, the preamble of the proposed rule noted the agencies' expectation that there may be instances when the rule would generate a risk-weighted asset amount for specific exposures that is not commensurate with the risks posed by such exposures. Accordingly, under the proposed rule, the bank's primary Federal supervisor would retain the authority to require the bank to use a different risk-weighted asset amount for the exposures or to use different risk parameters (for wholesale or retail exposures) or model assumptions (for modeled equity or securitization exposures) than those required when calculating the risk-weighted asset amount for those exposures. Similarly, the proposed rule provided explicit authority for a bank's primary Federal supervisor to require the bank to assign a different risk-weighted asset amount for operational risk, to change elements of its operational risk analytical framework (including distributional and dependence assumptions), or to make other changes to the bank's operational risk management processes, data and assessment systems, or quantification systems if the supervisor found that the risk-weighted asset amount for operational risk produced by the bank under the rule was not commensurate with the operational risks of the bank. Any agency that exercised a reservation of authority was expected to notify each of the other agencies of its determination.
Several commenters raised concerns with the scope of the reservation of authority, particularly as it would apply to operational risk. These commenters asserted, for example, that the agencies should address identified operational risk-related capital deficiencies through Pillar 2, rather than through requiring a bank to adjust input variables or techniques used for the calculation of Pillar 1 operational risk capital requirements. Commenters were concerned that excessive agency Pillar 1 intervention on operational risk might inhibit innovation.
While the agencies agree that innovation is important and that general supervisory oversight likely would be sufficient in many cases to address risk-related capital deficiencies, the agencies also believe that it is important to retain as much supervisory flexibility as possible as they move forward with implementation of the final rule. In general, the proposed reservation of authority represented a reaffirmation of the current authority of a bank's primary Federal supervisor to require the bank to hold an overall amount of regulatory capital or maintain capital ratios greater than would be required under the general risk-based capital rules. There may be cases where requiring a bank to assign a different risk-weighted asset amount for operational risk may not sufficiently address problems associated with underlying quantification practices and may cause an ongoing misalignment between the operational risk of a bank and the risk-weighted asset amount for operational risk generated by the bank's operational risk quantification system. In view of this and the inherent flexibility provided for operational risk measurement under the AMA, the agencies believe it is appropriate to articulate the specific measures a primary Federal supervisor may take if it determines that a bank's risk-weighted asset amount for operational risk is not commensurate with the operational risks of the bank. Therefore, the final rule retains the reservation of authority as proposed. The agencies emphasize that any decision to exercise this authority would be made judiciously and that a bank bears the primary responsibility for maintaining the integrity, reliability, and accuracy of its risk management and measurement systems.
Several commenters asked whether it would be permissible not to apply an aspect of the rule for cost or regulatory burden reasons, if the result would be
The agencies believe that in some cases it may be reasonable to allow a bank to implement a simplified capital calculation if the result is more conservative than would result from a comprehensive application of the rule. Under a new section 1(d) of the final rule, a bank may choose not to apply a provision of the rule to one or more exposures provided that (i) the bank can demonstrate on an ongoing basis to the satisfaction of its primary Federal supervisor that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each exposure greater than that which would otherwise be required under this final rule, (ii) the bank appropriately manages the risk of those exposures, (iii) the bank provides written notification to its primary Federal supervisor prior to applying this principle to each exposure, and (iv) the exposures to which the bank applies this principle are not, in the aggregate, material to the bank.
The agencies emphasize that a conservative capital requirement for a group of exposures does not reduce the need for appropriate risk management of those exposures. Moreover, the principle of conservatism applies to the determination of capital requirements for specific exposures; it does not apply to the qualification or disclosure requirements in sections 22 and 71 of the final rule. Sections V.A.1., V.A.3., and V.E.2. of this preamble contain examples of the appropriate use of this principle of conservatism.
Supervisory qualification to use the advanced approaches is an iterative and ongoing process that begins when a bank's board of directors adopts an implementation plan and continues as the bank operates under the advanced approaches. Under the final rule, as under the proposal, a bank must develop and adopt a written implementation plan, establish and maintain a comprehensive and sound planning and governance process to oversee the implementation efforts described in the plan, demonstrate to its primary Federal supervisor that it meets the qualification requirements in section 22 of the final rule, and complete a satisfactory “parallel run” (discussed below) before it may use the advanced approaches for risk-based capital purposes. A bank's primary Federal supervisor is responsible, after consultation with other relevant supervisors, for evaluating the bank's initial and ongoing compliance with the qualification requirements for the advanced approaches.
Under the final rule, as under the proposed rule, a bank preparing to implement the advanced approaches must adopt a written implementation plan, approved by its board of directors, describing in detail how the bank complies, or intends to comply, with the qualification requirements. A core bank must adopt a plan no later than six months after it meets a threshold criterion in section 1(b)(1) of the final rule. If a bank meets a threshold criterion on the effective date of the final rule, the bank would have to adopt a plan within six months of the effective date. Banks that do not meet a threshold criterion, but are nearing any criterion by internal growth or merger, are expected to engage in ongoing dialogue with their primary Federal supervisor regarding implementation strategies to ensure their readiness to adopt the advanced approaches when a threshold criterion is reached. An opt-in bank may adopt an implementation plan at any time. Under the final rule, each core and opt-in bank must submit its implementation plan, together with a copy of the minutes of the board of directors' approval of the plan, to its primary Federal supervisor at least 60 days before the bank proposes to begin its parallel run, unless the bank's primary Federal supervisor waives this prior notice provision. The submission to the primary Federal supervisor should indicate the date that the bank proposes to begin its parallel run.
In developing an implementation plan, a bank must assess its current state of readiness relative to the qualification requirements in this final rule. This assessment must include a gap analysis that identifies where additional work is needed and a remediation or action plan that clearly sets forth how the bank intends to fill the gaps it has identified. The implementation plan must comprehensively address the qualification requirements for the bank and each of its consolidated subsidiaries (U.S. and foreign-based) with respect to all portfolios and exposures of the bank and each of its consolidated subsidiaries. The implementation plan must justify and support any proposed temporary or permanent exclusion of a business line, portfolio, or exposure from the advanced approaches. The business lines, portfolios, and exposures that the bank proposes to exclude from the advanced approaches must be, in the aggregate, immaterial to the bank. The implementation plan must include objective, measurable milestones (including delivery dates and a date when the bank's implementation of the advanced approaches will be fully operational). For core banks, the implementation plan must include an explicit first transitional floor period start date that is no later than 36 months after the later of the effective date of the rule or the date the bank meets at least one of the threshold criteria.
The proposed rule allowed a bank to exclude a portfolio of exposures from the advanced approaches if the bank could demonstrate to the satisfaction of its primary Federal supervisor that the portfolio, when combined with all other portfolios of exposures that the bank sought to exclude from the advanced approaches, was not material to the bank. Some commenters asserted that a bank should be permitted to exclude from the advanced approaches any business line, portfolio, or exposure that is immaterial on a stand-alone basis (regardless of whether the excluded exposures in the aggregate are material to the bank). The agencies believe that it is not appropriate for a bank to permanently exclude a material portion of its exposures from the enhanced risk sensitivity and risk measurement and management requirements of the advanced approaches. Accordingly, the final rule retains the requirement that the business lines, portfolios, and exposures that the bank proposes to exclude from the advanced approaches must be, in the aggregate, immaterial to the bank.
During implementation of the advanced approaches, a bank should work closely with its primary Federal supervisor to ensure that its risk measurement and management systems are functional and reliable and are able to generate risk parameter estimates that can be used to calculate the risk-based capital ratios correctly under the advanced approaches. The
Under the proposed and final rules, once a bank has adopted its implementation plan, it must complete a satisfactory parallel run before it may use the advanced approaches to calculate its risk-based capital requirements. The proposed rule defined a satisfactory parallel run as a period of at least four consecutive calendar quarters during which a bank complied with all of the qualification requirements to the satisfaction of its primary Federal supervisor.
Many commenters objected to the proposed requirement that the bank had to meet all of the qualification requirements before it could begin the parallel run period. The agencies recognize that certain qualification requirements, such as outcomes analysis, become more meaningful as a bank gains experience employing the advanced approaches. The agencies therefore are modifying the definition of a satisfactory parallel run in the final rule. Under the final rule, a satisfactory parallel run is a period of at least four consecutive calendar quarters during which the bank complies with the qualification requirements to the satisfaction of its primary Federal supervisor. This revised definition, which does not contain the word “all,” recognizes that the qualification of banks for the advanced approaches during the parallel run period will be an iterative and ongoing process. The agencies intend to assess individual advanced approaches methodologies through numerous discussions, reviews, data collection and analysis, and examination activities. The agencies also emphasize the critical importance of ongoing validation of advanced approaches methodologies both before and after initial qualification decisions. A bank's primary Federal supervisor will review a bank's validation process and documentation for the advanced approaches on an ongoing basis through the supervisory process. The bank should include in its implementation plan the steps it will take to enhance compliance with the qualification requirements during the parallel run period.
Commenters also requested the flexibility, permitted under the New Accord, to apply the advanced approaches to some portfolios and other approaches (such as the standardized approach in the New Accord) to other portfolios during the transitional floor periods. The agencies believe, however, that banks applying the advanced approaches should move expeditiously to extend the robust risk measurement and management practices required by the advanced approaches to all material exposures. To preserve these positive risk measurement and management incentives for banks and to prevent “cherry picking” of portfolios, the final rule retains the provision in the proposed rule that states that a bank may enter the first transitional floor period only if it fully complies with the qualification requirements in section 22 of the rule. As described above, the final rule allows a simplified approach for portfolios that are, in the aggregate, immaterial to the bank.
Another concern identified by commenters regarding the parallel run was the asymmetric treatment of mergers and acquisitions consummated before and after the date a bank qualified to use the advanced approaches. Under the proposed rule, a bank qualified to use the advanced approaches that merged with or acquired a company would have up to 24 months following the calendar quarter during which the merger or acquisition was consummated to integrate the merged or acquired company into the bank's advanced approaches capital calculations. In contrast, the proposed rule could be read to provide that a bank that merged with or acquired a company before the bank qualified to use the advanced approaches had to fully implement the advanced approaches for the merged or acquired company before the bank could qualify to use the advanced approaches. The agencies agree that this asymmetric treatment is not appropriate. Accordingly, the final rule applies the merger and acquisition transition provisions both before and after a bank qualifies to use the advanced approaches. The merger and acquisition transition provisions are described in section III.D. of this preamble.
During the parallel run period, a bank continues to be subject to the general risk-based capital rules but simultaneously calculates its risk-based capital ratios under the advanced approaches. During this period, a bank will report its risk-based capital ratios under the general risk-based capital rules and the advanced approaches to its primary Federal supervisor through the supervisory process on a quarterly basis. The agencies will share this information with each other.
As described above, a bank must provide its board-approved implementation plan to its primary Federal supervisor at least 60 days before the bank proposes to begin its parallel run period. A bank also must receive approval from its primary Federal supervisor before beginning its first transitional floor period. In evaluating whether to grant approval to a bank to begin using the advanced approaches for risk-based capital purposes, the bank's primary Federal supervisor must determine that the bank fully complies with all the qualification requirements, the bank has conducted a satisfactory parallel run, and the bank has an adequate process to ensure ongoing compliance with the qualification requirements.
To provide for a smooth transition to the advanced approaches, the proposed rule imposed temporary limits on the amount by which a bank's risk-based capital requirements could decline over a period of at least three years (that is, at least four consecutive calendar quarters in each of the three transitional floor periods). Based on its assessment of the bank's ongoing compliance with the qualification requirements, a bank's primary Federal supervisor would determine when the bank is ready to move from one transitional floor period to the next period and, after the full transition has been completed, to exit the last transitional floor period and move to stand-alone use of the advanced approaches. Table A sets forth the proposed transitional floor periods for banks moving to the advanced approaches:
During the proposed transitional floor periods, a bank would calculate its risk-weighted assets under the general risk-based capital rules. Next, the bank would multiply this risk-weighted assets amount by the appropriate floor percentage in the table above. This product would be the bank's “floor-adjusted” risk-weighted assets. Third, the bank would calculate its tier 1 and total risk-based capital ratios using the
The bank also would calculate its tier 1 and total risk-based capital ratios using the advanced approaches definitions and rules. These ratios would be referred to as the “advanced approaches risk-based capital ratios.” In addition, the bank would calculate a tier 1 leverage ratio using tier 1 capital as defined in the proposed rule for the numerator of the ratio.
During a bank's transitional floor periods, the bank would report all five regulatory capital ratios described above—two floor-adjusted risk-based capital ratios, two advanced approaches risk-based capital ratios, and one leverage ratio. To determine its applicable capital category for PCA purposes and for all other regulatory and supervisory purposes, a bank's risk-based capital ratios during the transitional floor periods would be set equal to the lower of the respective floor-adjusted risk-based capital ratio and the advanced approaches risk-based capital ratio.
During the proposed transitional floor periods, a bank's tier 1 capital and tier 2 capital for all non-risk-based-capital supervisory and regulatory purposes (for example, lending limits and Regulation W quantitative limits) would be the bank's tier 1 capital and tier 2 capital as calculated under the advanced approaches.
Thus, for example, to be well capitalized under PCA, a bank would have to have a floor-adjusted tier 1 risk-based capital ratio and an advanced approaches tier 1 risk-based capital ratio of 6 percent or greater, a floor-adjusted total risk-based capital ratio and an advanced approaches total risk-based capital ratio of 10 percent or greater, and a tier 1 leverage ratio of 5 percent or greater (with tier 1 capital calculated under the advanced approaches). Although the PCA rules do not apply to BHCs, a BHC would be required to report all five of these regulatory capital ratios and would have to meet applicable supervisory and regulatory requirements using the lower of the respective floor-adjusted risk-based capital ratio and the advanced approaches risk-based capital ratio.
Under the proposed rule, after a bank completed its transitional floor periods and its primary Federal supervisor determined the bank could begin using the advanced approaches with no further transitional floor, the bank would use its tier 1 and total risk-based capital ratios as calculated under the advanced approaches and its tier 1 leverage ratio calculated using the advanced approaches definition of tier 1 capital for PCA and all other supervisory and regulatory purposes.
Although one commenter supported the proposed transitional provisions, many commenters objected to these transitional provisions. Commenters urged the agencies to conform the transitional provisions to those in the New Accord. Specifically, they requested that the three transitional floor periods be reduced to two periods and that the transitional floor percentages be reduced from 95 percent, 90 percent, and 85 percent to 90 percent and 80 percent. Commenters also requested that the transitional floor calculation methodology be conformed to the generally less restrictive methodology of the New Accord. Moreover, they expressed concern about the requirement that a bank obtain supervisory approval to move from one transitional floor period to the next, which could potentially extend each floor period beyond four calendar quarters.
The agencies believe that the prudential transitional safeguards are necessary to address concerns identified in the analysis of the results of QIS-4.
Under the final rule, as under the proposed rule, banks that meet the threshold criteria in section 1(b)(1) (core banks) as of the effective date of this final rule, and banks that opt in pursuant to section 1(b)(2) at the earliest possible date, must use the general risk-based capital rules both during the parallel run and as a basis for the transitional floor calculations. Should the agencies finalize a standardized risk-based capital rule, the agencies expect that a bank that opts in after the earliest possible date or becomes a core bank after the effective date of the final rule would use the risk-based capital regime (the general risk-based capital rules or the standardized risk-based capital rules) used by the bank immediately before the bank begins its parallel run both during the parallel run and as a basis for the transitional floor calculations. Under the final rule, 2008 is the first possible year for a bank to begin its parallel run and 2009 is the first possible year for a bank to begin its first of three transitional floor periods.
Because the advanced approaches use banks' estimates of certain key risk parameters to determine risk-based capital requirements, they introduce greater complexity to the regulatory capital framework and require banks to possess a high level of sophistication in risk measurement and risk management systems. As a result, the final rule requires each core or opt-in bank to meet the qualification requirements described in section 22 of the final rule to the satisfaction of its primary Federal supervisor for a period of at least four consecutive calendar quarters before using the advanced approaches to calculate its minimum risk-based capital requirements (subject to the transitional floor provisions for at least an additional three years). The qualification requirements are written broadly to accommodate the many ways a bank may design and implement robust internal credit and operational risk measurement and management systems, and to permit industry practice to evolve.
Many of the qualification requirements relate to a bank's advanced IRB systems. A bank's advanced IRB systems must incorporate
(i) A risk rating and segmentation system that assigns ratings to individual wholesale obligors and exposures and assigns individual retail exposures to segments;
(ii) A quantification process that translates the risk characteristics of wholesale obligors and exposures and segments of retail exposures into numerical risk parameters that are used as inputs to the IRB risk-based capital formulas;
(iii) An ongoing process that validates the accuracy of the rating assignments, segmentations, and risk parameters;
(iv) A data management and maintenance system that supports the advanced IRB systems; and
(v) Oversight and control mechanisms that ensure the advanced IRB systems are functioning effectively and producing accurate results.
One of the objectives of the advanced approaches framework is to provide appropriate incentives for banks to develop and use better techniques for measuring and managing their risks and to ensure that capital is adequate to support those risks. Section 3 of the final rule requires a bank to hold capital commensurate with the level and nature of all risks to which the bank is exposed. Section 22 of the final rule specifically requires a bank to have a rigorous process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining appropriate capital levels (known as the internal capital adequacy assessment process or ICAAP). Another objective of the advanced approaches framework is to ensure comprehensive supervisory review of capital adequacy.
On February 28, 2007, the agencies issued proposed guidance setting forth supervisory expectations for a bank's ICAAP and addressing the process for a comprehensive supervisory assessment of capital adequacy.
As outlined in the proposed guidance, the agencies expect banks to implement and continually update the fundamental elements of a sound ICAAP—identifying and measuring material risks, setting capital adequacy goals that relate to risk, and ensuring the integrity of internal capital adequacy assessments. A bank is expected to ensure adequate capital is held against all material risks.
In developing its ICAAP, a bank should be particularly mindful of the limitations of regulatory risk-based capital requirements as a measure of its full risk profile—including risks not covered or not adequately quantified in the risk-based capital requirements—as well as specific assumptions embedded in risk-based regulatory capital requirements (such as diversification in credit portfolios). A bank should also be mindful of the capital adequacy effects of concentrations that may arise within each risk type or across risk types. In general, a bank's ICAAP should reflect an appropriate level of conservatism to account for uncertainty in risk identification, risk mitigation or control, quantitative processes, and any use of modeling. In most cases, this conservatism will result in higher levels of capital or higher capital ratios being regarded as adequate.
As noted above, each core and opt-in bank must apply the advanced approaches for risk-based capital purposes at the consolidated top-tier U.S. legal entity level (either the top-tier U.S. BHC or top-tier DI that is a core or opt-in bank) and at each DI that is a subsidiary of such a top-tier legal entity (unless a primary Federal supervisor provides an exemption under section 1(b)(3) of the final rule). Each bank that applies the advanced approaches must have an appropriate infrastructure with risk measurement and management processes that meet the final rule's qualification requirements and that are appropriate given the bank's size and level of complexity. Regardless of whether the systems and models that generate the risk parameters necessary for calculating a bank's risk-based capital requirements are located at an affiliate of the bank, each legal entity that applies the advanced approaches must ensure that the risk parameters (PD, LGD, EAD, and, for wholesale exposures, M) and reference data used to determine its risk-based capital requirements are representative of its own credit and operational risk exposures.
The final rule also requires that the systems and processes that an advanced approaches bank uses for risk-based capital purposes must be consistent with the bank's internal risk management processes and management information reporting systems. This means, for example, that data from the latter processes and systems can be used to verify the reasonableness of the inputs the bank uses for calculating risk-based capital ratios.
To implement the IRB approach, a bank must have internal risk rating and segmentation systems that accurately and reliably differentiate between degrees of credit risk for wholesale and retail exposures. As described below, wholesale exposures include most credit exposures to companies, sovereigns, and other governmental entities, as well as some exposures to individuals. Retail exposures include most credit exposures to individuals and small credit exposures to businesses that are managed as part of a segment of exposures with homogeneous risk characteristics. Together, wholesale and retail exposures cover most credit exposures of banks.
To differentiate among degrees of credit risk, a bank must be able to make meaningful and consistent distinctions among credit exposures along two dimensions—default risk and loss severity in the event of a default. In addition, a bank must be able to assign wholesale obligors to rating grades that approximately reflect likelihood of default and must be able to assign wholesale exposures to loss severity rating grades (or LGD estimates) that approximately reflect the loss severity expected in the event of default during economic downturn conditions. As discussed below, the final rule requires banks to treat wholesale exposures differently from retail exposures when differentiating among degrees of credit risk; specifically, risk parameters for retail exposures are assigned at the segment level.
Under the proposed rule, a bank would be required to have an internal risk rating system that indicates the likelihood of default of each individual
Several commenters objected to the proposed requirement to assign an internal risk rating to each wholesale obligor that reflected the obligor's likelihood of default. Commenters asserted that this requirement was burdensome and unnecessary where a bank underwrote an exposure based solely on the financial strength of a guarantor and used the PD substitution approach (discussed below) to recognize the risk mitigating effects of an eligible guarantee on the exposure. In such cases, commenters maintained that banks should be allowed to assign a PD only to the guarantor and not the underlying obligor.
While the agencies believe that maintaining internal risk ratings of both a protection provider and underlying obligor provides helpful information for risk management purposes and facilitates a greater understanding of so-called double default effects, the agencies appreciate the commenters' concerns about burden in this context. Accordingly, the final rule does not require a bank to assign an internal risk rating to an underlying obligor to whom the bank extends credit based solely on the financial strength of a guarantor, provided that all of the bank's exposures to that obligor are fully covered by eligible guarantees and the bank applies the PD substitution approach to all of those exposures. A bank in this situation is only required to assign an internal risk rating to the guarantor. However, a bank must immediately assign an internal risk rating to the obligor if a guarantee can no longer be recognized under this final rule.
In determining an obligor rating, a bank should consider key obligor attributes, including both quantitative and qualitative factors that could affect the obligor's default risk. From a quantitative perspective, this could include an assessment of the obligor's historic and projected financial performance, trends in key financial performance ratios, financial contingencies, industry risk, and the obligor's position in the industry. On the qualitative side, this could include an assessment of the quality of the obligor's financial reporting, non-financial contingencies (for example, labor problems and environmental issues), and the quality of the obligor's management based on an evaluation of management's ability to make realistic projections, management's track record in meeting projections, and management's ability to effectively adapt to changes in the economy and the competitive environment.
Under the proposed rule, a bank would assign each legal entity wholesale obligor to a single rating grade. Accordingly, if a single wholesale exposure of the bank to an obligor triggered the proposed rule's definition of default, all of the bank's wholesale exposures to that obligor would be in default for risk-based capital purposes. In addition, under the proposed rule, a bank would not be allowed to consider the value of collateral pledged to support a particular wholesale exposure (or any other exposure-specific characteristics) when assigning a rating to the obligor of the exposure. A bank would, however, consider all available financial information about the obligor—including, where applicable, the total operating income or cash flows from all of the obligor's projects or businesses—when assigning an obligor rating.
While a few commenters expressly supported the proposal's requirement for banks to assign each legal entity wholesale obligor to a single rating grade, a substantial number of commenters expressed reservations about this requirement. These commenters observed that in certain circumstances an exposure's transaction-specific characteristics affect its likelihood of default. Commenters asserted that the agencies should provide greater flexibility and allow banks to depart from the one-rating-per-obligor requirement based on the economic substance of an exposure. In particular, commenters maintained that income-producing real estate lending should be exempt from the one-rating-per-obligor requirement. The commenters noted that the probability that an obligor will default on any one such facility depends primarily on the cash flows from the individual property securing the facility, not the overall condition of the obligor. Similarly, several commenters asserted that exposures involving transfer risk and non-recourse exposures should be exempted from the one-rating-per-obligor requirement.
In general, the agencies believe that a two-dimensional rating system that strictly separates borrower and exposure-level characteristics is a critical underpinning of the IRB approach. However, the agencies agree that exposures to the same borrower denominated in different currencies may have different default probabilities. For example, a sovereign government may impose prohibitive exchange restrictions that make it impossible for a borrower to transfer payments in one particular currency.
In addition, the agencies agree that certain income-producing real estate exposures for which the bank, in economic substance, does not have recourse to the borrower beyond the real estate serving as collateral for the exposure, have default probabilities distinct from that of the borrower. Such situations would arise, for example, where real estate collateral is located in a state where a bank, under applicable state law, effectively does not have recourse to the borrower if the bank pursues the real estate collateral in the event of default (for example, in a “one-action” state or a state with a similar law). In one-action states such as Arizona, California, Idaho, Montana, Nevada, and Utah, or in a state with a similar law, such as New York, the applicable foreclosure laws materially limit a bank's ability to collect against both the collateral and the borrower.
A third instance in which exposures to the same borrower may have significantly different default probabilities is when a borrower enters bankruptcy and the bank extends additional credit to the borrower under the auspices of the bankruptcy proceedings. This so-called debtor in possession (DIP) financing is unique from other exposure types because it typically has priority over existing debt, equity, and other claims on the borrower. The agencies believe that because of this unique priority status, if a bank has an exposure to a borrower that declares bankruptcy and defaults on that exposure, and the bank subsequently provides DIP financing to that obligor, it may not be appropriate to require the bank to treat the DIP financing exposure at inception as an exposure to a defaulted borrower.
To address these circumstances and clarify the application of the one-rating-per-obligor requirement, the agencies added a definition of obligor in the final rule. The final rule defines an obligor as the legal entity or natural person contractually obligated on a wholesale exposure except that a bank may treat three types of exposures to the same legal entity or natural person as having separate obligors. First, exposures to the same legal entity or natural person denominated in different currencies. Second, (i) income-producing real estate exposures for which all or substantially all of the repayment of the exposure is reliant on cash flows of the real estate serving as collateral for the exposure;
A bank's obligor rating system must have at least seven discrete (non-overlapping) obligor grades for non-defaulted obligors and at least one obligor grade for defaulted obligors. The agencies believe that because the risk-based capital requirement of a wholesale exposure is directly linked to its obligor rating grade, a bank must have at least seven non-overlapping obligor grades to differentiate sufficiently the creditworthiness of non-defaulted wholesale obligors.
A bank must capture the estimated loss severity upon default for a wholesale exposure either by directly assigning an LGD estimate to the exposure or by grouping the exposure with other wholesale exposures into loss severity rating grades (reflecting the bank's estimate of the LGD of the exposure). LGD is described in more detail below. Whether a bank chooses to assign LGD values directly or, alternatively, to assign exposures to rating grades and then quantify the LGD for the rating grades, the key requirement is that the bank must identify exposure characteristics that influence LGD. Each of the loss severity rating grades must be associated with an empirically supported LGD estimate. Banks employing loss severity grades must have a sufficiently granular loss severity grading system to avoid grouping together exposures with widely ranging LGDs.
To implement the advanced approach for retail exposures, a bank must have an internal system that segments its retail exposures to differentiate accurately and reliably among degrees of credit risk. The most significant difference between the treatment of wholesale and retail exposures is that the risk parameters for wholesale exposures are assigned at the individual exposure level, whereas risk parameters for retail exposures are assigned at the segment level. Banks typically manage retail exposures on a segment basis, where each segment contains exposures with similar risk characteristics. Therefore, a key characteristic of the final rule's retail framework is that the risk parameters for retail exposures are assigned to segments of exposures rather than to individual exposures. Under the retail framework, a bank groups its retail exposures into segments with homogeneous risk characteristics and estimates PD and LGD for each segment.
Some commenters stated that for internal risk management purposes they assign risk parameters at the individual retail exposure level rather than at the segment level. These commenters requested confirmation that this practice would be permissible for risk-based capital purposes under the final rule. The agencies believe that a bank may use its advanced systems, including exposure-level risk parameter estimates, to group exposures into segments with homogeneous risk characteristics. Such exposure-level estimates must be aggregated in order to assign segment-level risk parameters to each segment of retail exposures.
A bank must group its retail exposures into three separate subcategories: (i) Residential mortgage exposures; (ii) QREs; and (iii) other retail exposures. The bank must classify the retail exposures in each subcategory into segments to produce a meaningful differentiation of risk. The final rule requires banks to segment separately (i) defaulted retail exposures from non-defaulted retail exposures and (ii) retail eligible margin loans for which the bank adjusts EAD rather than LGD to reflect the risk mitigating effects of financial collateral from other retail eligible margin loans. Otherwise, the agencies do not require that banks consider any particular risk drivers or employ any minimum number of segments in any of the three retail subcategories.
In determining how to segment retail exposures within each subcategory for the purpose of assigning risk parameters, a bank should use a segmentation approach that is consistent with its approach for internal risk assessment purposes and that classifies exposures according to predominant risk characteristics or drivers. Examples of risk drivers could include loan-to-value ratios, credit scores, loan terms and structure, origination channel, geographical location of the borrower, collateral type, and bank internal estimates of likelihood of default and loss severity given default. Regardless of the risk drivers used, a bank must be able to demonstrate to its primary Federal supervisor that its system assigns accurate and reliable PD and LGD estimates for each retail segment on a consistent basis.
A number of commenters on the ANPR encouraged the agencies to use a wholesale definition of default that varied from the New Accord but conformed more closely to that used by bank risk managers. Many of these commenters recommended that the agencies define default for wholesale exposures as the entry into non-accrual or charge-off status. In the proposed rule, the agencies amended the ANPR definition of default to respond to these concerns. Under the proposed definition of default, a bank's wholesale obligor would be in default if, for any wholesale exposure of the bank to the obligor, the bank had (i) placed the exposure on non-accrual status consistent with the Consolidated Report of Condition and Income (Call Report) Instructions or the Thrift Financial Report (TFR) and the TFR Instruction Manual; (ii) taken a full or partial charge-off or write-down on the exposure due to the distressed financial condition of the obligor; or (iii) incurred a credit-related loss of 5 percent or more of the exposure's initial carrying value in connection with the sale of the exposure or the transfer of the exposure to the held-for-sale, available-for-sale, trading account, or other reporting category.
The agencies received extensive comment on the proposed definition of default for wholesale exposures. Commenters observed that the proposed definition of default was different from and more prescriptive than the definition in the New Accord and employed in other major jurisdictions. They asserted that the proposed definition would impose unjustifiable systems burden and expense on banks operating across multiple jurisdictions. Commenters also asserted that many
The 5 percent credit-related loss trigger in the proposed definition of default for wholesale obligors was the focus of significant commenter concern. Commenters asserted that the trigger inappropriately imported LGD and maturity-related considerations into the definition of default, could hamper the use of loan sales as a risk management practice, and could cause obligors that are performing on their obligations to be considered defaulted. These commenters also claimed that the 5 percent trigger would add significant implementation burden by, for example, requiring banks to distinguish between credit-related and non-credit-related losses on sale.
Many commenters requested that the agencies conform the U.S. wholesale definition of default to the New Accord. Other commenters requested that banks be allowed the option to apply either the U.S. or the New Accord definition of default.
The agencies agree that the proposed definition of default for wholesale obligors could have unintended consequences for implementation burden and international consistency. Therefore, the final rule contains a definition of default for wholesale obligors that is similar to the definition proposed in the ANPR and consistent with the New Accord. Specifically, under the final rule, a bank's wholesale obligor is in default if, for any wholesale exposure of the bank to the obligor: (i) The bank considers that the obligor is unlikely to pay its credit obligations to the bank in full, without recourse by the bank to actions such as realizing collateral (if held); or (ii) the obligor is past due more than 90 days on any material credit obligation to the bank. The final rule also clarifies, consistent with the New Accord, that an overdraft is past due once the obligor has breached an advised limit or has been advised of a limit smaller than the current outstanding balance.
Consistent with the New Accord, the following elements may be indications of unlikeliness to pay under this definition:
(i) The bank places the exposure on non-accrual status consistent with the Call Report Instructions or the TFR and the TFR Instruction Manual;
(ii) The bank takes a full or partial charge-off or write-down on the exposure due to the distressed financial condition of the obligor;
(iii) The bank incurs a material credit-related loss in connection with the sale of the exposure or the transfer of the exposure to the held-for-sale, available-for-sale, trading account, or other reporting category;
(iv) The bank consents to a distressed restructuring of the exposure that is likely to result in a diminished financial obligation caused by the material forgiveness or postponement of principal, interest or (where relevant) fees;
(v) The bank has filed as a creditor of the obligor for purposes of the obligor's bankruptcy under the U.S. Bankruptcy Code (or a similar proceeding in a foreign jurisdiction regarding the obligor's credit obligation to the bank); or
(vi) The obligor has sought or has been placed in bankruptcy or similar protection that would avoid or delay repayment of the exposure to the bank.
If a bank carries a wholesale exposure at fair value for accounting purposes, the bank's practices for determining unlikeliness to pay for purposes of the definition of default should be consistent with the bank's practices for determining credit-related declines in the fair value of the exposure.
Like the proposed definition of default for wholesale obligors, the final rule states that a wholesale exposure to an obligor remains in default until the bank has reasonable assurance of repayment and performance for all contractual principal and interest payments on all exposures of the bank to the obligor (other than exposures that have been fully written-down or charged-off). The agencies expect a bank to employ standards for determining whether it has a reasonable assurance of repayment and performance that are similar to those for determining whether to restore a loan from non-accrual to accrual status.
Although some commenters supported the proposed rule's retail definition of default, others urged the agencies to adopt a 90-days-past-due default trigger consistent with the New Accord's definition of default for retail exposures. Other commenters requested that a non-accrual trigger be added to the retail definition of default similar to that in the proposed wholesale definition of default. The commenters viewed this as a practical way to allow a foreign banking organization to harmonize the U.S. retail definition of default to a home country definition of default that has a 90-days-past-due trigger.
The agencies believe that adding a non-accrual trigger to the retail definition of default is not appropriate. Retail non-accrual practices vary considerably among banks, and adding a non-accrual trigger to the retail definition of default would result in greater inconsistency among banks in the treatment of retail exposures. Moreover, a bank that considers retail exposures to be defaulted at 90 days past due could have significantly different risk parameter estimates than one that uses 120- and 180-days-past-due thresholds. Such a bank would likely have higher PD estimates and lower LGD estimates due to the established tendency of a nontrivial proportion of U.S. retail exposures to “cure” or return to performing status after becoming 90 days past due and before becoming 120 or 180 days past due. The agencies believe that the 120- and 180-days-past-due thresholds, which are consistent with national discretion provided by the New Accord, reflect a point at which retail exposures in the United States are unlikely to return to performing status. Therefore, the agencies are incorporating the proposed retail definition of default without substantive change in the final rule. (Parallel to the full or partial
The New Accord provides discretion for national supervisors to set the retail default trigger at up to 180 days past due for different products, as appropriate to local conditions. Accordingly, banks implementing the IRB approach in multiple jurisdictions may be subject to different retail definitions of default in their home and host jurisdictions. The agencies recognize that it could be costly and burdensome for a U.S. bank to track default data and estimate risk parameters based on both the U.S. definition of default and the definitions of default in non-U.S. jurisdictions where subsidiaries of the U.S. bank implement the IRB approach. The agencies are therefore incorporating flexibility into the retail definition of default. Specifically, for a retail exposure held by a U.S. bank's non-U.S. subsidiary subject to an internal ratings-based approach to capital adequacy consistent with the New Accord in a non-U.S. jurisdiction, the final rule allows the bank to elect to use the definition of default of that jurisdiction, subject to prior approval by the bank's primary Federal supervisor. The primary Federal supervisor will revoke approval for a bank to use this provision if the supervisor finds that the bank uses the provision to arbitrage differences in national definitions of default.
The definition of default for retail exposures differs from the definition for the wholesale portfolio in that the retail default definition applies on an exposure-by-exposure basis rather than on an obligor-by-obligor basis. In other words, default on one retail exposure does not require a bank to treat all other retail obligations of the same borrower to the bank as defaulted. This difference reflects the fact that banks generally manage retail credit risk based on segments of similar exposures rather than through the assignment of ratings to particular borrowers. In addition, it is quite common for retail borrowers that default on some of their obligations to continue payment on others.
Although the retail definition of default does not explicitly include credit-related losses in connection with loan sales and the agencies have replaced the 5 percent credit-related loss threshold for wholesale exposures with a less prescriptive treatment that is consistent with the New Accord, the agencies expect banks to ensure that exposure sales do not bias or otherwise distort the estimated risk parameters assigned by a bank to its wholesale exposures and retail segments.
A bank's internal risk rating policy for wholesale exposures must describe the bank's rating philosophy, which is how the bank's wholesale obligor rating assignments are affected by the bank's choice of the range of economic, business, and industry conditions that are considered in the obligor rating process. The philosophical basis of a bank's rating system is important because, when combined with the credit quality of individual obligors, it will determine the frequency of obligor rating changes in a changing economic environment. Rating systems that rate obligors based on their ability to perform over a wide range of economic, business, and industry conditions, sometimes described as “through-the-cycle” systems, tend to have ratings that migrate more slowly as conditions change. Banks that rate obligors based on a more narrow range of likely expected conditions (primarily on recent conditions), sometimes called “point-in-time” systems, tend to have ratings that migrate more frequently. Many banks will rate obligors using an approach that considers a combination of the current conditions and a wider range of other likely conditions. In any case, the bank must specify the rating philosophy used and establish a policy for the migration of obligors from one rating grade to another in response to economic cycles. A bank should understand the effects of ratings migration on its risk-based capital requirements and ensure that sufficient capital is maintained during all phases of the economic cycle.
Each wholesale obligor rating and (if applicable) wholesale exposure loss severity rating must reflect current information. A bank's internal risk rating system for wholesale exposures must provide for the review and update (as appropriate) of each obligor rating and (if applicable) loss severity rating whenever the bank receives new material information, but no less frequently than annually. Under the proposed rule, a bank's retail exposure segmentation system would provide for the review and update (as appropriate) of assignments of retail exposures to segments whenever the bank received new material information. The proposed rule specified that the review would be required no less frequently than quarterly.
One commenter noted that quarterly reviews may not be appropriate for high-quality retail portfolios, such as retail exposures associated with a bank's wealth management or private banking businesses. The commenter suggested that banks should have the flexibility to review and update segmentation assignments for such portfolios on a less frequent basis appropriate to the credit quality of the portfolios.
The agencies agree that it may be appropriate for a bank to review and update segmentation assignments for certain high-quality retail exposures on a less frequent basis than quarterly, provided a bank is following sound risk management practices. Therefore, the final rule generally requires a quarterly review and update, as appropriate, of retail exposure segmentation assignments, allowing some flexibility to accommodate sound internal risk management practices.
A bank must have a comprehensive risk parameter quantification process that produces accurate, timely, and reliable estimates of the risk parameters—PD, LGD, EAD, and (for wholesale exposures) M—for its wholesale obligors and exposures and retail exposures. Statistical methods and models used to develop risk parameter estimates, as well as any adjustments to the estimates or empirical data, should be transparent, well supported, and documented. The following sections of the preamble discuss the rule's definitions of the risk parameters for wholesale exposures and retail segments.
As noted above, under the final rule, a bank must assign each of its wholesale obligors to an internal rating grade and then must associate a PD with each rating grade. PD for a wholesale exposure to a non-defaulted obligor is the bank's empirically based best estimate of the long-run average one-year default rate for the rating grade assigned by the bank to the obligor, capturing the average default experience for obligors in the rating grade over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the rating grade.
In addition, under the final rule, a bank must assign a PD to each segment of retail exposures. Some types of retail exposures typically display a seasoning pattern—that is, the exposures have
Commenters objected to this treatment of retail exposures with material seasoning effects. They asserted that requiring banks to use an annualized cumulative default rate to recognize seasoning effects was too prescriptive and would preclude other reasonable approaches. The agencies believe that commenters have presented reasonable alternative approaches to recognizing the effects of seasoning in PD and are, therefore, providing additional flexibility for recognizing those effects in the final rule.
Based on comments and additional consideration, the agencies also are clarifying that a segment of retail exposures has material seasoning effects if there is a material relationship between the time since origination of exposures within the segment and the bank's best estimate of the long-run average one-year default rate for the exposures in the segment. Moreover, because the agencies believe that the IRB approach must, at a minimum, require banks to hold appropriate amounts of risk-based capital to address credit risks over a one-year horizon, the final rule's incorporation of seasoning effects is explicitly one-directional. Specifically, a bank must increase PDs above the best estimate of the long-run average one-year default rate for segments of unseasoned retail exposures, but may not decrease PD below the best estimate of the long-run average one-year default rate for a segment of retail exposures that the bank estimates will have lower PDs in future years due to seasoning.
The final rule defines PD for a segment of non-defaulted retail exposures as the bank's empirically based best estimate of the long-run average one-year default rate for the exposures in the segment, capturing the average default experience for exposures in the segment over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the segment and adjusted upward as appropriate for segments for which seasoning effects are material. If a bank does not adjust PD to reflect seasoning effects for a segment of exposures, it should be able to demonstrate to its primary Federal supervisor, using empirical analysis, why seasoning effects are not material or why adjustment is not relevant for the segment.
For wholesale exposures to defaulted obligors and for segments of defaulted retail exposures, PD is 100 percent.
Under the proposed rule, a bank would directly estimate an ELGD and LGD risk parameter for each wholesale exposure or would assign each wholesale exposure to an expected loss severity grade and a downturn loss severity grade, estimate an ELGD risk parameter for each expected loss severity grade, and estimate an LGD risk parameter for each downturn loss severity grade. In addition, a bank would estimate an ELGD and LGD risk parameter for each segment of retail exposures.
The proposed rule defined the ELGD of a wholesale exposure as the bank's empirically based best estimate of the default-weighted average economic loss per dollar of EAD the bank expected to incur in the event that the obligor of the exposure (or a typical obligor in the loss severity grade assigned by the bank to the exposure) defaulted within a one-year horizon.
Many commenters objected to the proposed rule's requirement for banks to estimate ELGD for each wholesale exposure and retail segment, noting that ELGD estimation is not required under the New Accord. Commenters asserted that requiring ELGD estimation would create a competitive disadvantage by creating additional systems, compliance, calculation, and reporting burden for those banks subject to the U.S. rule, many of which have already substantially developed their systems based on the New Accord. They also maintained that it would decrease the comparability of U.S. banks’ capital requirements and public disclosures relative to those of foreign banking organizations applying the advanced approaches. Several commenters also contended that defining ECL in terms of ELGD instead of LGD raised tier 1 risk-based capital requirements for U.S. banks compared to foreign banks using the New Accord's LGD-based ECL definition.
The agencies have concluded that the regulatory burden and potential competitive inequities identified by commenters outweigh the supervisory benefits of the proposed ELGD risk parameter, and are, therefore, not including it in the final rule. Instead, consistent with the New Accord, a bank must use LGD for the calculation of ECL and the EL component of the IRB risk-based capital formulas. Because the proposed ELGD risk parameter was equal to or less than LGD, this change generally will have the effect of decreasing both the numerator and denominator of the risk-based capital ratios.
Consistent with the New Accord, under the final rule, the LGD of a wholesale exposure or retail segment must not be less than the bank's
Commenters requested additional clarity regarding the treatment of post-default extensions of credit. LGD is an estimate of the economic loss that would be incurred on an exposure, relative to the exposure's EAD, if the obligor were to default within a one-year horizon during economic downturn conditions. The estimated economic loss amount must capture all material credit-related losses on the exposure (including accrued but unpaid interest or fees, losses on the sale of repossessed collateral, direct workout costs, and an appropriate allocation of indirect workout costs). Where positive or negative cash flows on a wholesale exposure to a defaulted obligor or on a defaulted retail exposure (including proceeds from the sale of collateral, workout costs, and draw-downs of unused credit lines) are expected to occur after the date of default, the estimated economic loss amount must reflect the net present value of cash flows as of the default date using a discount rate appropriate to the risk of the exposure. The possibility of post-default extensions of credit made to facilitate collection of an exposure would be treated as negative cash flows and reflected in LGD.
For example, assume a loan to a retailer goes into default. The bank determines that the recovery would be enhanced by some additional expenditure to ensure an orderly workout process. One option would be for the bank to hire a third-party to facilitate the collection of the loan. Another option would be for the bank to extend additional credit directly to the defaulted obligor to allow the obligor to make an orderly liquidation of inventory. Both options represent negative cash flows on the original exposure, which must be discounted at a rate that is appropriate to the risk of the exposure.
The expected loss severities of some exposures may be substantially higher during economic downturn conditions than during other periods, while for other types of exposures they may not. Accordingly, the proposed rule required banks to use an LGD estimate that reflected economic downturn conditions for purposes of calculating the risk-based capital requirements for wholesale exposures and retail segments.
Several commenters objected to the requirement that LGD estimates must reflect economic downturn conditions. Some of these commenters stated that empirical evidence of correlation between economic downturn and LGD is inconclusive, except in certain cases. A few noted that estimates of expected LGD include conservative inputs, such as a conservative estimate of potential loss in the event of default or a conservative discount rate or collateral assumptions. One commenter suggested that if a bank can demonstrate it has been prudent in its LGD estimation and it has no evidence of the cyclicality of LGDs, it should not be required to calculate downturn LGDs. Other commenters remarked that the requirement to incorporate downturn conditions into LGD estimates should not be used as a surrogate for proper modeling of PD/LGD correlations. Finally, a number of commenters supported a pillar 2 approach for addressing LGD estimation.
Consistent with the New Accord, the final rule maintains the requirement for a bank to use an LGD estimate that reflects economic downturn conditions for purposes of calculating the risk-based capital requirements for wholesale exposures and retail segments. More specifically, banks must produce for each wholesale exposure (or loss severity rating grade) and retail segment an estimate of the economic loss per dollar of EAD that the bank would expect to incur if default were to occur within a one-year horizon during economic downturn conditions.
For the purpose of defining economic downturn conditions, the proposed rule identified two wholesale exposure subcategories—high-volatility commercial real estate (HVCRE) wholesale exposures and non-HVCRE wholesale exposures (that is, all wholesale exposures that are not HVCRE exposures)—and three retail exposure subcategories—residential mortgage exposures, QREs, and other retail exposures. The proposed rule defined economic downturn conditions with respect to an exposure as those conditions in which the aggregate default rates for the exposure's entire wholesale or retail subcategory held by the bank (or subdivision of such subcategory selected by the bank) in the exposure's national jurisdiction (or subdivision of such jurisdiction selected by the bank) were significantly higher than average.
The agencies specifically sought comment on whether to require banks to determine economic downturn conditions at a more granular level than an entire wholesale or retail exposure subcategory in a national jurisdiction. Some commenters stated that the proposed requirement is at a sufficiently granular level. Others asserted that the requirement should be eliminated or made less granular. Those commenters favoring less granularity stated that aggregate default rates for different product subcategories in different countries are unlikely to peak at the same time and that requiring economic downturn analysis at the product subcategory and national jurisdiction level does not recognize potential diversification effects across products and national jurisdictions and is thus overly conservative. Commenters also maintained that the proposed granularity requirement adds complexity and implementation burden relative to the New Accord.
The agencies believe that the proposed definition of economic downturn conditions incorporates an appropriate level of granularity and are incorporating it unchanged in the final rule. The agencies understand that downturns in particular geographical subdivisions of national jurisdictions or in particular industrial sectors may result in significantly increased loss rates in material subdivisions of a bank's exposures. The agencies also recognize that diversification across those subdivisions may mitigate risk for the overall organization. However, the agencies believe that the required minimum level of granularity at the subcategory and national jurisdiction level provides a suitable balance between allowing for the benefits of diversification and appropriate conservatism for risk-based capital requirements.
Under the final rule, a bank must consider economic downturn conditions that appropriately reflect its actual exposure profile. For example, a bank with a geographical or industry sector concentration in a subcategory of exposures may find that information relating to a downturn in that geographical region or industry sector may be more relevant for the bank than a general downturn affecting many
The proposed rule provided banks two methods of generating LGD estimates for wholesale exposures and retail segments. First, a bank could use its own estimates of LGD for a subcategory of exposures if the bank had prior written approval from its primary Federal supervisor to use internal estimates for that subcategory of exposures. In approving a bank's use of internal estimates of LGD, a bank's primary Federal supervisor would consider whether the bank's internal estimates of LGD were reliable and sufficiently reflective of economic downturn conditions. The supervisor would also consider whether the bank has rigorous and well-documented policies and procedures for identifying economic downturn conditions for the exposure subcategory, identifying material adverse correlations between the relevant drivers of default rates and loss rates given default, and incorporating identified correlations into internal LGD estimates. If a bank had supervisory approval to use its own estimates of LGD for an exposure subcategory, it would use its own estimates of LGD for all exposures within that subcategory.
As an alternative to internal estimates of LGD, the proposed rule provided a supervisory mapping function for converting ELGD into LGD for risk-based capital purposes. A bank that did not qualify to use its own estimates of LGD for a subcategory of exposures would instead compute LGD using the linear supervisory mapping function: LGD = 0.08 + 0.92 × ELGD. A bank would not have to apply the supervisory mapping function to repo-style transactions, eligible margin loans, and OTC derivative contracts (defined below in section V.C. of this preamble). The agencies proposed the supervisory mapping function because of concerns that banks may find it difficult to produce internal estimates of LGD that are sufficient for risk-based capital purposes because LGD data for important portfolios may be sparse, and there is limited industry experience with incorporating downturn conditions into LGD estimates. The supervisory mapping function provided a pragmatic methodology for banks to use while refining their LGD estimation techniques.
In general, commenters viewed the supervisory mapping function as a significant deviation from the New Accord that would add unwarranted prescriptiveness and regulatory burden to the U.S. rule. Commenters requested more flexibility to address problems with LGD estimation, including the ability to apply appropriate margins of conservatism as contemplated in the New Accord. Commenters expressed concern that U.S. supervisors would employ an unreasonably high standard for allowing own estimates of LGD, forcing banks to use the supervisory mapping function for an extended period of time. Commenters also expressed concern that supervisors would view the output of the supervisory mapping function as a floor on internal estimates of LGD. Commenters asserted that in both cases risk-based capital requirements would be increased at U.S. banks relative to their foreign competitors, particularly for high-quality assets, putting U.S. banks at a competitive disadvantage to foreign banks.
In particular, many commenters viewed the supervisory mapping function as overly punitive for exposure categories with relatively low loss severities, effectively imposing an 8 percent floor on LGD. Commenters also objected to the proposed requirement that a bank use the supervisory mapping function for an entire subcategory of exposures even if it had difficulty estimating LGD only for a small subset of those exposures.
The agencies continue to believe that the supervisory mapping function is a reasonable aid for dealing with problems in LGD estimation. The agencies recognize, however, that there may be several valid methodologies for addressing such problems. For example, a relative scarcity of historical loss data for a particular obligor or exposure type may be addressed by increased reliance on alternative data sources and data-enhancing tools for quantification and alternative techniques for validation. In addition, a bank should reflect in its estimates of risk parameters a margin of conservatism that is related to the likely range of uncertainty. These concepts are discussed below in the quantification principles section of the preamble.
Therefore, the agencies are not including the supervisory mapping function in the final rule. However, the agencies continue to believe that the function (and associated estimation of the long-run default-weighted average economic loss rate given default within a one-year horizon) is one way a bank could address difficulties in estimating LGD. However it chooses to estimate LGD, a bank's estimates of LGD must be reliable and sufficiently reflective of economic downturn conditions, and the bank should have rigorous and well-documented policies and procedures for identifying economic downturn conditions for each exposure subcategory, identifying changes in material adverse relationships between the relevant drivers of default rates and loss rates given default, and incorporating identified relationships into LGD estimates.
The proposed rule incorporated comments on the ANPR suggesting a need to better accommodate certain credit products, most prominently asset-based lending programs, whose structures typically result in a bank recovering substantial amounts of the exposure prior to the default date—for example, through paydowns of outstanding principal. The agencies believe that actions taken prior to default to mitigate losses are an important component of a bank's overall credit risk management, and that such actions should be reflected in LGD when banks can quantify their effectiveness in a reliable manner. In the proposed rule, this was achieved by measuring LGD relative to the exposure's EAD (defined in the next section) as opposed to the amount actually owed at default.
Commenters agreed that the IRB approach should allow banks to recognize in their risk parameters the benefits of expected pre-default recoveries and other expected reductions in exposure prior to default. Some commenters suggested, however, that it is more appropriate to reflect pre-default recoveries in EAD rather than LGD. Other commenters supported the proposed rule's approach or asserted that banks should have the option of incorporating pre-default recoveries in either LGD or EAD. Commenters discouraged the agencies from restricting the types of pre-default
Consistent with the New Accord, the agencies have decided to maintain the proposed treatment of pre-default reductions in exposure in the final rule. The final rule does not limit the exposure types to which a bank may apply this treatment. However, the agencies have clarified their requirement for quantification of LGD in section 22(c)(4) of the final rule. This section states that where the bank's quantification of LGD directly or indirectly incorporates estimates of the effectiveness of its credit risk management practices in reducing its exposure to troubled obligors prior to default, the bank must support such estimates with empirical analysis showing that the estimates are consistent with its historical experience in dealing with such exposures during economic downturn conditions.
A bank's methods for reflecting changes in exposure during the period prior to default must be consistent with other aspects of the final rule. For example, a bank must use a default horizon no longer than one year, consistent with the one-year default horizon incorporated in other aspects of the final rule, such as the quantification of PD. In addition, a pre-default reduction in the outstanding amount on one exposure that does not reflect a reduction in the bank's total exposure to the obligor, such as a refinancing, should not be reflected as a pre-default recovery for LGD quantification purposes.
The following simplified example illustrates how a bank could approach incorporating pre-default reductions in exposure in LGD. Assume a bank has a portfolio of asset-based loans fully collateralized by receivables. The bank maintains a database of such loans that have defaulted, which records the exposure at the time of default and the losses incurred at and after the date of default. After careful analysis of its historical data, the bank finds that for every $100 of exposure on a typical asset-based loan at the time of default, properly discounted average losses are $80 under economic downturn conditions. Thus, the bank may assign an LGD estimate of 80 percent that is based on such evidence.
However, assume that the bank division responsible for collections reports that the bank's loan workout practices generally result in exposures on the asset-based loans being significantly reduced between the time the loan is identified internally as a problem exposure and the time when the obligor is in default for risk-based capital purposes. The bank studies the pre-default paydown behavior of obligors that default within the next one-year horizon and during economic downturn conditions. In particular, the bank uses its internal historical data to map exposure amounts for asset-based loans at the time of default to exposure amounts for the same loans at various points in time prior to default and confirms that the pattern of pre-default paydowns corresponds to reductions in the bank's overall exposures to the obligors, as opposed to refinancings.
Robust empirical analysis further indicates that pre-default paydowns for asset-based loans to obligors that default within the next one-year horizon during economic downturn conditions depend on the length of time the loan has been subject to workout. Specifically, the bank finds that the prospects for further pre-default paydowns diminish markedly the longer the bank has managed the loan as a problem credit exposure. For loans that are not in workout or that the bank has placed in workout for fewer than 90 days, the bank's analysis indicates that pre-default paydowns on loans to obligors defaulting within the next year during economic downturn conditions were, on average, 50 percent of the current amount owed by the obligor. In contrast, for asset-based loans that have been in workout for at least 90 days, the bank's analysis indicates that any further pre-default recoveries tend to be immaterial. Thus, provided this analysis is suitable for estimating LGDs according to section 22(c) of the final rule, the bank may appropriately assign an LGD estimate of 40 percent to asset-based loans that are not in workout or that have been in workout for fewer than 90 days. For asset-based loans that have been in workout for at least 90 days, the bank should assign an LGD of 80 percent.
Under the proposed rule, EAD for the on-balance sheet component of a wholesale or retail exposure generally was (i) the bank's carrying value for the exposure (including net accrued but unpaid interest and fees)
One commenter asserted that banks should not be required to include net accrued but unpaid interest and fees in EAD. Rather, this commenter requested the flexibility to incorporate such interest and fees in either EAD or LGD. The agencies believe that net accrued but unpaid interest and fees represent credit exposure to an obligor, similar to the unpaid principal of a loan extended to the obligor, and thus are most appropriately included in EAD. Moreover, requiring all banks to include such interest and fees in EAD rather than LGD promotes consistency and comparability across banks for regulatory reporting and public disclosure purposes.
The agencies are therefore maintaining the substance of the proposed rule's definition of EAD for on-balance sheet exposures in the final rule. The final rule clarifies that, for purposes of EAD, all exposures other than securities classified as available-for sale receive the treatment specified for exposures classified as held-to-maturity or for trading under the proposal. Some exposures held at fair value, such as partially funded loan commitments, may have both on-balance sheet and off-balance sheet components. In such cases, a bank must compute EAD for both the positive on- and off-balance sheet components of the exposure.
For the off-balance sheet component of a wholesale or retail exposure (other than an OTC derivative contract, repo-style transaction, or eligible margin loan) in the form of a loan commitment or line of credit, EAD under the proposed rule was the bank's best estimate of net additions to the outstanding amount owed the bank, including estimated future additional draws of principal and accrued but unpaid interest and fees, that were likely to occur over the remaining life of the exposure assuming the exposure were to go into default. This estimate of net additions would reflect what would be expected during a period of economic downturn conditions. This treatment is retained in the final rule. Also, consistent with the New Accord, the final rule extends this “own estimates” treatment to trade-related letters of credit and for transaction-related contingencies. Trade-related letters of credit are short-term self-liquidating instruments used to finance the movement of goods and are
For the off-balance sheet component of a wholesale or retail exposure other than an OTC derivative contract, repo-style transaction, eligible margin loan, loan commitment, or line of credit issued by a bank, EAD was the notional amount of the exposure. This treatment is retained in the final rule.
One commenter asked the agencies to permit banks to employ the New Accord's flexibility to reflect additional draws on lines of credit in either LGD or EAD. For the same reasons that the agencies are requiring banks to include net accrued but unpaid interest and fees in EAD, the agencies have decided to continue the requirement in the final rule for banks to reflect estimates of additional draws in EAD, consistent with the proposed rule.
Another commenter noted that the “remaining life of the exposure” concept in the proposed definition of EAD for off-balance sheet exposures is ambiguous and inconsistent with defining PD over a one-year horizon. To address this commenter's concern, the agencies have modified the definition of EAD. The final rule requires a bank to estimate net additions to the outstanding amount owed the bank in the event of default over a one-year horizon.
Other commenters noted that banks may reduce their exposure to certain sectors in periods of economic downturn, and inquired as to the extent to which such practices may be reflected in EAD estimates. The agencies believe that such practices may be reflected in EAD estimates for loan commitments, lines of credit, trade-related letters of credit, and transaction-related contingencies to the extent that those practices are reflected in the bank's data on defaulted exposures. They may be reflected in EAD estimates for on-balance sheet exposures only at the time the on-balance sheet exposure is actually reduced.
To illustrate the EAD concept, assume a bank has a $100 unsecured, fully drawn, two-year term loan with $10 of interest payable at the end of the first year and a balloon payment of $110 at the end of the term. Suppose it has been six months since the loan's origination, and accrued interest equals $5. The EAD of this loan would be equal to the outstanding principal amount plus accrued interest, or $105.
Next, consider the case of an open-end revolving credit line of $100, on which the borrower had drawn $70 (the unused portion of the line is $30). Current accrued but unpaid interest and fees are zero. The bank can document that, on average, during economic downturn conditions, 20 percent of the remaining undrawn amounts are drawn in the year preceding a firm's default. Therefore, the bank's estimate of future draws is $6 (20% × $30). Additionally, the bank's analysis indicates that, on average, during economic downturn conditions, such a facility can be expected to have accrued at the time of default unpaid interest and commitment fees equal to three months of interest against the drawn amount and 0.5 percent against the undrawn amount, which in this example is assumed to equal $0.25. Thus, the EAD for estimated future accrued but unpaid interest and fees equals $0.25. In sum, the EAD should be the drawn amount plus estimated future accrued but unpaid fees plus the estimated amount of future draws = $76.25 ($70 + $0.25 + $6).
Under the proposed rule, EAD for a segment of retail exposures was the sum of the EADs for each individual exposure in the segment. The agencies have changed this provision in the final rule, recognizing that banks typically estimate EAD for a segment of retail exposures rather than on an individual exposure basis.
Under the final and proposed rules, for wholesale or retail exposures in which only the drawn balance has been securitized, the bank must reflect its share of the exposures' undrawn balances in EAD. The undrawn balances of revolving exposures for which the drawn balances have been securitized must be allocated between the seller's and investors' interests on a pro rata basis, based on the proportions of the seller's and investors' shares of the securitized drawn balances. For example, if the EAD of a group of securitized exposures' undrawn balances is $100, and the bank's share (seller's interest) in the securitized exposures is 25 percent, the bank must reflect $25 in EAD for the undrawn balances.
The final rule (like the proposed rule) contains a separate treatment of EAD for OTC derivative contracts, which is in section 32 of the rule and discussed in more detail in section V.C. of the preamble. The final rule also clarifies that a bank may use the treatment of EAD in section 32 of the rule for repo-style transactions and eligible margin loans, or the bank may use the general definition of EAD described in this section for such exposures.
The final rule, like the proposed rule, requires data used by a bank to estimate risk parameters to be relevant to the bank's actual wholesale and retail exposures and of sufficient quality to support the determination of risk-based capital requirements for the exposures. For wholesale exposures, estimation of the risk parameters must be based on a minimum of five years of default data to estimate PD, seven years of loss severity data to estimate LGD, and seven years of exposure amount data to estimate EAD. For segments of retail exposures, estimation of risk parameters must be based on a minimum of five years of default data to estimate PD, five years of loss severity data to estimate LGD, and five years of exposure amount data to estimate EAD. Default, loss severity, and exposure amount data must include periods of economic downturn conditions or the bank must adjust its estimates of risk parameters to compensate for the lack of data from such periods. Banks must base their estimates of PD, LGD, and EAD on the final rule's definition of default, and must review at least annually and update (as appropriate) their risk parameters and risk parameter quantification process.
In all cases, banks are expected to use the best available data for quantifying the risk parameters. A bank could meet the minimum data requirement by using internal data, external data, or pooled data combining internal data with external data. Internal data refers to any data on exposures held in a bank's existing or historical portfolios, including data elements or information provided by third parties regarding such exposures. External data refers to information on exposures held outside of the bank's portfolio or aggregate information across an industry. For new lines of business, where a bank lacks sufficient internal data, a bank likely will need to use external data to supplement its internal data.
The agencies recognize that the minimum sample period for reference data provided in the final rule may not provide the best available results. A longer sample period usually captures varying economic conditions better than a shorter sample period. In addition, a longer sample period will include more default observations for LGD and EAD estimation. Banks should consider using a longer-than-minimum sample period when possible. However, the potential increase in precision afforded by a larger sample size should be weighed against the potential for diminished
Many commenters requested further clarity about the procedures that banks should use to estimate risk parameters for portfolios characterized by a lack of internal data or with very little default experience. In particular, the GAO report recommended that the agencies provide additional clarity on this issue. Several commenters indicated that the agencies should establish criteria for identifying homogeneous portfolios of low-risk exposures and allow banks to apportion expected loss between LGD and PD for those portfolios rather than estimating each risk parameter separately. Other commenters suggested that the agencies consider whether banks should be permitted to use the New Accord's standardized approach for credit risk for such portfolios.
The final rule requires banks to meet the qualification requirements in section 22 for all portfolios of exposures. The agencies expect that banks demonstrating appropriately rigorous processes and sufficient degrees of conservatism for portfolios with limited data or limited defaults will be able to meet the qualification requirements. Section 22(c)(3) of the final rule specifically states that a bank's risk parameter quantification process “must produce appropriately conservative risk parameter estimates where the bank has limited relevant data.” The agencies believe that this section provides sufficient flexibility and incentives for banks to develop and document sound practices for applying the IRB approach to portfolios lacking sufficient data.
The section of the preamble below expands upon potential approaches to portfolios with limited data. The BCBS publication “Validation of low-default portfolios in the Basel II Framework”
For instance, consider a bank that has recently extended its credit card operations to include a new market segment for credit card loans and, therefore, has limited internal data on the performance of the exposures in this new market segment. The bank could acquire external data from various vendors that would provide a broad, market-wide picture of default and loss experience in the new market segment. This external data could then be supplemented by the bank's internal data and experience with its existing credit card operations. By comparing the bank's experience with its existing customers to the market data, the bank can refine the risk parameters estimated from the external data on the new market segment and make those parameters more accurate for the bank's new market segment of exposures. Using the combination of these data sources, the bank may be able to estimate appropriately conservative estimates of risk parameters for its new market segment of exposures. If the bank is not able to do so, it must include the new market segment of exposures in its set of aggregate immaterial exposures and apply a 100 percent risk weight.
As with the cases described above in which internal data are limited in all dimensions, external data from some related portfolios or for similar obligors may be used to estimate risk parameters that are then mapped to the low default portfolio or obligor. For example, banks could consider instances of near default or credit deterioration short of default in these low default portfolios to inform estimates of what might happen if a default were to occur. Similarly, scenario analysis that evaluates the hypothetical impact of severe market disruptions may help inform the bank's parameter estimates for margin loans. For very low-risk wholesale obligors that have publicly traded financial instruments, banks may be able to glean information about the relative values of PD and LGD from different changes in credit spreads on instruments of different maturity or from different moves in credit spreads and equity prices. In all cases, risk parameter estimates should incorporate a degree of conservatism that is appropriate for the overall rigor of the quantification process.
As noted above, periods of economic downturn conditions must be included in the data sample (or adjustments to risk parameters must be made). If the reference data include data from beyond the minimum number of years (to capture a period of economic downturn conditions or for other valid reasons), the reference data need not cover all of the intervening years. However, a bank should justify the exclusion of available data and, in particular, any temporal discontinuities in data used. Including periods of economic downturn conditions increases the size and potentially the breadth of the reference data set. According to some empirical studies, the average loss rate is higher during periods of economic downturn
Risk parameter estimates should take into account the robustness of the quantification process. The assumptions and adjustments embedded in the quantification process should reflect the degree of uncertainty or potential error inherent in the process. In practice, a reasonable estimation approach likely would result in a range of defensible risk parameter estimates. The choices of the particular assumptions and adjustments that determine the final estimate, within the defensible range, should reflect the uncertainty in the quantification process. More uncertainty in the process should be reflected in the assignment of final risk parameter estimates that result in higher risk-based capital requirements relative to a quantification process with less uncertainty. The degree of conservatism applied to adjust for uncertainty should be related to factors such as the relevance of the reference data to a bank's existing exposures, the robustness of the models, the precision of the statistical estimates, and the amount of judgment used throughout the process. A bank is not required to add a margin of conservatism at each step if doing so would produce an excessively conservative result. Instead, the overall margin of conservatism should adequately account for all uncertainties and weaknesses in the quantification process. Improvements in the quantification process (including use of more complete data and better estimation techniques) may reduce the appropriate degree of conservatism over time.
Judgment will inevitably play a role in the quantification process and may materially affect the estimates of risk parameters. Judgmental adjustments to estimates are often necessary because of limitations on available reference data or because of inherent differences between the reference data and the bank's existing exposures. The bank's risk parameter quantification process must produce appropriately conservative risk parameter estimates when the bank has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates. This does not prohibit individual adjustments that result in lower estimates of risk parameters, as both upward and downward adjustments are expected. Individual adjustments are less important than broad patterns; consistent signs of judgmental decisions that materially lower risk parameter estimates may be evidence of systematic bias, which is not permitted.
In estimating relevant risk parameters, banks should not rely on the possibility of U.S. government financial assistance, except for the financial assistance that the U.S. government has a legally binding commitment to provide.
A bank that intends to apply the internal models methodology to counterparty credit risk, the double default treatment for credit risk mitigation, the IAA for securitization exposures to ABCP programs, or the IMA to equity exposures must receive prior written approval from its primary Federal supervisor. The criteria on which approval will be based are described in the respective sections below.
A bank must have operational risk management processes, data and assessment systems, and quantification systems that meet the qualification requirements in section 22(h) of the final rule. A bank must have an operational risk management function that is independent of business line management. The operational risk management function is responsible for the design, implementation, and oversight of the bank's operational risk data and assessment systems, operational risk quantification systems, and related processes. The roles and responsibilities of the operational risk management function may vary between banks, but should be clearly documented. The operational risk management function should have an organizational stature commensurate with the bank's operational risk profile. At a minimum, the bank's operational risk management function should ensure the development of policies and procedures for the explicit management of operational risk as a distinct risk to the bank's safety and soundness.
A bank also must establish and document a process to identify, measure, monitor, and control operational risk in bank products, activities, processes, and systems. This process should provide for the consistent and comprehensive collection of the data needed to estimate the bank's exposure to operational risk. This process must capture business environment and internal control factors affecting the bank's operational risk profile. The process must also ensure reporting of operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and to the board of directors (or a designated committee of the board).
The final rule defines an operational loss event as an event that results in loss and is associated with any of the seven operational loss event type categories. Under the final rule, the agencies have included definitions of the seven operational loss event type categories, consistent with the descriptions outlined in the New Accord. The seven operational loss event type categories are: (i) Internal fraud, which is the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity and discrimination-type events; (ii) external fraud, which is the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property or circumvent the law;
The final rule does not require a bank to capture internal operational loss event data according to these categories. However, unlike the proposed rule, the final rule requires that a bank must be able to map such data into the seven operational loss event type categories. The agencies believe such mapping will promote reporting consistency and comparability across banks and is consistent with expectations in the New Accord.
A bank's operational risk management processes should reflect the scope and complexity of its business lines, as well as its corporate organizational structure. Each bank's operational risk profile is unique and should have a tailored risk management approach appropriate for the scale and materiality of the operational risks present in the bank.
A bank must have an operational risk data and assessment system that incorporates on an ongoing basis the following four elements: internal operational loss event data, external operational loss event data, results of scenario analysis, and assessments of the bank's business environment and internal controls. These four operational risk elements should aid the bank in identifying the level and trend of operational risk, determining the effectiveness of operational risk management and control efforts, highlighting opportunities to better mitigate operational risk, and assessing operational risk on a forward-looking basis. A bank's operational risk data and assessment system must be structured in a manner consistent with the bank's current business activities, risk profile, technological processes, and risk management processes.
The proposed rule defined operational loss as a loss (excluding insurance or tax effects) resulting from an operational loss event. Operational losses included all expenses associated with an operational loss event except for opportunity costs, forgone revenue, and costs related to risk management and control enhancements implemented to prevent future operational losses. The definition of operational loss is an important issue, as it is a critical building block in a bank's calculation of its operational risk capital requirement under the AMA. More specifically, the bank's estimate of operational risk exposure—the basis for determining a bank's risk-weighted asset amount for operational risk—is an estimate of aggregate operational losses generated by the bank's AMA process.
Many commenters supported the agencies' proposed definition of operational loss and viewed it as appropriate and consistent with general use within the banking industry. Some commenters, however, opposed the inclusion of a specific definition of operational loss and asserted that the proposed treatment of operational loss is too prescriptive. In addition, some commenters maintained that including a definition of operational loss is inconsistent with the New Accord, which does not explicitly define operational loss. In response to a specific question in the proposal, many commenters asserted that the definition of operational loss should relate to its impact on regulatory capital rather than economic capital concepts. One commenter, however, recommended using the replacement cost of any fixed asset affected by an operational loss event to reflect the actual financial impact of the event.
Because operational losses are the building blocks in a bank's calculation of its operational risk capital requirement under the AMA, the agencies continue to believe that it is necessary to define what is meant by operational loss to achieve comparability and foster consistency both across banks and across business lines within a bank. Additionally, the agencies agree with those commenters who asserted that the definition of operational loss should relate to its impact on regulatory capital. Therefore, the agencies have adopted the proposed definition of operational loss unchanged.
In the preamble to the proposed rule, the agencies recognized that there was a potential to double-count all or a portion of the risk-based capital requirement associated with fixed assets. Under the proposed rule, the credit-risk-weighted asset amount for a bank's premises would equal the carrying value of the premises on the financial statements of the bank, determined in accordance with GAAP. A bank's operational risk exposure estimate addressing bank premises generally would be different than, and in addition to, the risk-based capital requirement generated under the proposed rule and could, at least in part, address the same risk exposure. The majority of commenters on this issue recommended removing the credit risk capital requirement for premises and other fixed assets and preserving only the operational risk capital requirement.
The agencies are maintaining the proposed rule's treatment of fixed assets in the final rule. The New Accord generally provides a risk weight of 100 percent for assets for which an IRB treatment is not specified.
A bank must have a systematic process for capturing and using internal operational loss event data in its operational risk data and assessment systems. The final rule defines a bank's internal operational loss event data as its gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at the bank. Under the proposed rule, a bank's operational risk data and assessment system would include a minimum historical observation period of five years of internal operational losses. With approval of its primary Federal supervisor, however, a bank could use a shorter historical observation period to address transitional situations such as integrating a new business line. A bank also could refrain from collecting internal operational loss event data for individual operational losses below established dollar threshold amounts if the bank could demonstrate to the satisfaction of its primary Federal supervisor that the thresholds were reasonable, did not exclude important internal operational loss event data, and permitted the bank to capture substantially all the dollar value of the bank's operational losses.
Several commenters expressed concern over the proposal's five-year minimum historical observation period requirement for internal operational loss event data. These commenters recommended that the agencies align this provision with the New Accord, which allows for a three-year historical observation period upon initial AMA implementation.
While the proposed rule required a bank to include in its operational risk data and assessment systems a historical observation period of at least five years for internal operational loss event data, it also provided for a shorter observation period subject to agency approval to address transitional situations, such as integrating a new business line. The agencies believe that these proposed provisions provide sufficient flexibility to consider other situations, on a case-by-case basis, in which a shorter observation period may be appropriate, such as a bank's initial implementation of an AMA. Therefore, the final rule retains the five-year historical observation period requirements and the transitional flexibility for internal operational loss event data, as proposed.
In relation to the provision that permits a bank to refrain from collecting internal operational loss event data below established thresholds, a few commenters sought clarification of the proposed requirement that the thresholds must permit the bank to capture “substantially all” of the dollar value of a bank's operational losses. In particular, they questioned whether a bank must collect all or a very high percentage of operational losses or whether smaller losses could be modeled.
To demonstrate the appropriateness of its threshold for internal operational loss event data collection, a bank might choose to collect all internal operational loss event data, at least for a time, to support a meaningful analysis around the appropriateness of its chosen data collection threshold. Alternatively, a bank might be able to obtain data from systems outside of its operational risk data and assessment system (for example, the bank's general ledger system) to demonstrate the impact of choosing different thresholds on its operational risk exposure estimates.
With respect to the commenters' question regarding modeling smaller losses, the agencies would consider permitting such an approach based on whether the approach meets the overall qualification requirements outlined in the final rule. In particular, the agencies would consider whether the bank satisfies those requirements pertaining to a bank's operational risk quantification system as well as its control, oversight, and validation mechanisms. Such modeling considerations, however, would not eliminate the requirement for a bank to demonstrate the appropriateness of any established internal operational loss event data collection thresholds.
A bank also must establish a systematic process to determine its methodologies for incorporating external operational loss event data into its operational risk data and assessment systems. The proposed and final rules define external operational loss event data for a bank as gross operational loss amounts, dates, recoveries, and relevant causal information for operational loss events occurring at organizations other than the bank. External operational loss event data may serve a number of different purposes in a bank's operational risk data and assessment systems. For example, external operational loss event data may be a particularly useful input in determining a bank's level of exposure to operational risk when internal operational loss event data are limited. In addition, external operational loss event data provide a means for the bank to understand industry experience and, in turn, provide a means for the bank to assess the adequacy of its internal operational loss event data.
While internal and external operational loss event data provide a historical perspective on operational risk, it is also important that a bank incorporate forward-looking elements into its operational risk data and assessment systems. Accordingly, under the final rule, as under the proposed rule, a bank must incorporate business environment and internal control factors into its operational risk data and assessment systems to assess fully its exposure to operational risk. In principle, a bank with strong internal controls in a stable business environment would have less exposure to operational risk than a bank with internal control weaknesses that is growing rapidly or introducing new products. In this regard, a bank should identify and assess the level and trends in operational risk and related control structures at the bank. These assessments should be current and comprehensive across the bank, and they should identify the operational risks facing the bank. The framework established by a bank to maintain these risk assessments should be sufficiently flexible to accommodate increasing complexity, new activities, changes in internal control systems, and an increasing volume of information. A bank must also periodically compare the results of its prior business environment and internal control factor assessments against the bank's actual operational losses incurred in the intervening period.
A few commenters sought clarification on the agencies' expectations regarding a bank's periodic comparisons of its prior business environment and internal control factor assessments against its actual operational losses. One commenter expressed concern over the difficulty of conducting an empirically robust analysis to fulfill the requirement.
Under the final rule, a bank has flexibility in the approach it uses to conduct its business environment and internal control factor assessments. As such, the methods for conducting comparisons of these assessments against actual operational loss experience may also vary and precise modeling calibration may not be practical. The agencies maintain, however, that it is important for a bank to perform such comparisons to ensure that its assessments are current, reasonable, and appropriately factored into the bank's AMA framework. In addition, the comparisons could highlight the need for potential adjustments to the bank's operational risk management processes.
A bank also must have a systematic process for determining its methodologies for incorporating scenario analysis into its operational risk data and assessment systems. As an input to a bank's operational risk data and assessment systems, scenario analysis is especially relevant for business lines or operational loss event types where internal data, external data, and assessments of the business environment and internal control factors do not provide a sufficiently robust estimate of the bank's exposure to operational risk.
Similar to business environment and internal control factor assessments, the results of scenario analysis provide a means for a bank to incorporate a forward-looking element into its operational risk data and assessment systems. Under the proposed rule, scenario analysis was defined as a systematic process of obtaining expert opinions from business managers and risk management experts to derive reasoned assessments of the likelihood and loss impact of plausible high-severity operational losses. The agencies have clarified this definition in the final rule to recognize that there are various methods and inputs a bank may use to conduct its scenario analysis. For this reason, the modified definition indicates that scenario analysis may
A bank's operational risk data and assessment systems must include credible, transparent, systematic, and verifiable processes that incorporate all four operational risk elements (that is, internal operational loss event data, external operational loss event data, scenario analysis, and business environment and internal control factors). The bank should have clear standards for the collection and modification of all elements. The bank should combine these four elements in a manner that most effectively enables it to quantify its exposure to operational risk.
A bank must have an operational risk quantification system that generates estimates of its operational risk exposure using its operational risk data and assessment systems. The final rule defines operational risk exposure as the 99.9th percentile of the distribution of potential aggregate operational losses, as generated by the bank's operational risk quantification system over a one-year horizon (and not incorporating eligible operational risk offsets or qualifying operational risk mitigants). The mean of such a total loss distribution is the bank's EOL. The final rule defines EOL as the expected value of the distribution of potential aggregate operational losses, as generated by the bank's operational risk quantification system using a one-year horizon. The bank's UOL is the difference between the bank's operational risk exposure and the bank's EOL.
A few commenters sought clarification on whether the agencies would impose specific requirements around the use and weighting of the four elements of a bank's operational risk data and assessment system, and whether there were any limitations on how external data or scenario analysis could be used as modeling inputs. Another commenter expressed concern that for some U.S.-chartered DIs that were subsidiaries of foreign banking organizations, it might be difficult to ever have enough internal operational loss event data to generate statistically significant operational risk exposure estimates.
The agencies recognize that banks will have different inputs and methodologies for estimating their operational risk exposure given the inherent flexibility of the AMA. It follows that the weights assigned in combining the four required elements of a bank's operational risk data and assessment system (internal operational loss event data, external operational loss event data, scenario analysis, and assessments of the bank's business environment and internal control factors) will also vary across banks. Factors affecting the weighting include a bank's operational risk profile, operational loss experience, internal control environment, and relative quality and content of the four elements. These factors will influence the emphasis placed on certain elements relative to others. As such, the agencies are not prescribing specific requirements around the weighting of each element, nor are they placing any specific limitations on the use of the elements. In view of this flexibility, however, under the final rule a bank's operational risk quantification systems must include a credible, transparent, systematic, and verifiable approach for weighting the use of the four elements.
As part of its operational risk exposure estimate, a bank must use a unit of measure that is appropriate for the bank's range of business activities and the variety of operational loss events to which it is exposed. The proposed rule defined a unit of measure as the level (for example, organizational unit or operational loss event type) at which the bank's operational risk quantification system generated a separate distribution of potential operational losses. Under the proposed rule, a bank could not combine business activities or operational loss events with different risk profiles within the same loss distribution.
Many commenters expressed concern that the prohibition against combining business activities or operational loss events with different risk profiles within the same loss distribution was an impractical standard because some level of combination was unavoidable. Additionally, commenters noted that data limitations made it difficult to quantify risk profiles at a granular level. Commenters also expressed concern that the proposed rule appeared to preclude the use of “top-down” approaches, given that under a firm-wide approach business activities or operational loss events with different risk profiles would necessarily be combined within the same loss distribution. One commenter suggested that, because of data limitations and the potential for wide variations in risk profiles within individual business lines and/or types of operational loss events, banks be afforded some latitude in moving from a “top-down” approach to a “bottom-up” approach.
The agencies have retained the proposed definition of unit of measure in the final rule. The agencies recognize, however, that there is a need for flexibility in assessing whether a bank's chosen unit of measure is appropriate for the bank's range of business activities and the variety of operational loss events to which it is exposed. In some instances, data limitations may indeed prevent a bank's operational risk quantification systems from generating a separate distribution of potential operational losses for certain business lines or operational loss event types. Therefore, the agencies have modified the final rule to provide a bank more flexibility in devising an appropriate unit of measure. Specifically, a bank must employ a unit of measure that is appropriate for its range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution.
The agencies recognize that operational losses across operational loss event types and business lines may be related. Under the final rule, as under the proposed rule, a bank may use its internal estimates of dependence among operational losses within and across business lines and operational loss event types if the bank can demonstrate to the satisfaction of its primary Federal supervisor that its process for estimating dependence is sound, robust to a variety of scenarios, implemented with integrity, and allows for the uncertainty surrounding the estimates. The agencies expect that a bank's assumptions regarding dependence will be conservative given the uncertainties surrounding dependence modeling for operational risk. If a bank does not satisfy the requirements surrounding dependence, the bank must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure.
Under the proposed rule, dependence was defined as “a measure of the association among operational losses across and within business lines and operational loss event types.” One commenter recommended that the agencies revise the definition of dependence to “a measure of the association among operational losses across and within units of measure.” The agencies recognize that examples of units of measure include, but are not limited to, business lines and operational loss event types, and that a bank's operational risk quantification system could generate distributions of potential operational losses that are
As noted above, under the proposed rule, a bank that did not satisfy the requirements surrounding dependence would sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure. Several commenters asserted that the New Accord does not require a bank to sum its operational risk exposure estimates across units of measure if the bank cannot demonstrate adequate support of its dependence assumptions. One commenter asked the agencies to remove this requirement from the final rule. Several commenters suggested that if a bank cannot provide sufficient support for its dependence estimates, a conservative assumption of positive dependence is warranted, but not an assumption of perfect positive dependence as implied by the summation requirement. Another commenter suggested that the dependence assumption should be based upon a conservative statistical analysis of industry data.
The New Accord states that, absent a satisfactory demonstration of a bank's “systems for determining correlations” to its national supervisor, “risk measures for different operational risk estimates must be added for purposes of calculating the regulatory minimum capital requirement.”
Several commenters believed that a bank should be permitted to demonstrate the nature of the relationship between the causes of different operational losses based on any available informative empirical evidence. These commenters suggested that such evidence could be statistical or anecdotal, and could be based on information ranging from established statistical techniques to more general mathematical approaches to clear logical arguments about the degree to which risks and losses are related, or the similarity of circumstance between the bank and a peer group for which acceptable estimates of dependency are available.
The agencies recognize that there may be different ways to estimate the relationship among operational losses across and within units of measure. Therefore, under the final rule, a bank has flexibility to use different methodologies to demonstrate dependence across units of measure. However, the bank must demonstrate to the satisfaction of its primary Federal supervisor that its process for estimating dependence is sound, robust to a variety of scenarios, implemented with integrity, and allows for the uncertainty surrounding the estimates.
A bank's chosen unit of measure affects how it should account for dependence. Explicit assumptions regarding dependence across units of measure are always necessary to estimate operational risk exposure at the bank level. However, explicit assumptions regarding dependence within units of measure are not necessary, and under many circumstances models assume statistical independence within each unit of measure. The use of only a few units of measure increases the need to ensure that dependence within units of measure is suitably reflected in the operational risk exposure estimate.
In addition, the bank's process for estimating dependence should provide for ongoing monitoring, recognizing that dependence estimates can change. The agencies expect that a bank's approach for developing explicit and objective dependence determinations will improve over time. As such, the bank should develop a process for assessing incremental improvements to the approach (for example, through out-of-sample testing).
Under the final rule, as under the proposed rule, a bank must review and update (as appropriate) its operational risk quantification system whenever the bank becomes aware of information that may have a material effect on the bank's estimate of operational risk exposure, but no less frequently than annually.
The agencies recognize that, in limited circumstances, there may not be sufficient data available for a bank to generate a credible estimate of its own operational risk exposure at the 99.9 percent confidence level. In these limited circumstances, under the proposed rule, a bank could use an alternative operational risk quantification system, subject to prior approval by the bank's primary Federal supervisor. The alternative approach was not available at the BHC level.
One commenter asserted that, in line with the New Accord's continuum of operational risk measurement approaches, all banks, including BHCs, should be permitted to adopt an alternative operational risk quantification system, such as the New Accord's standardized approach or allocation approach. The commenter further noted that a bank's use of an allocation approach should not be subject to more stringent terms and conditions than those set forth in the New Accord.
The agencies are maintaining the alternative approach provision in the final rule. The agencies are not prescribing specific estimation methodologies under this approach and expect use of an alternative approach to occur on a very limited basis. A bank proposing to use an alternative operational risk quantification system must submit a proposal to its primary Federal supervisor. In evaluating a bank's proposal, the primary Federal supervisor will review the bank's justification for requesting use of an alternative approach in light of the bank's size, complexity, and risk profile. The bank's primary Federal supervisor will also consider whether the estimate of operational risk under the alternative approach is appropriate (for example, whether the estimate results in capital levels that are commensurate with the bank's operational risk profile and is sensitive to changes in the bank's risk profile) and can be supported empirically. Furthermore, the agencies expect a bank using an alternative operational risk quantification system to adhere to the rule's qualification requirements, including establishment and use of operational risk management processes and data and assessment systems. As under the proposed rule, the alternative approach is not available at the BHC level.
A bank proposing an alternative approach to operational risk based on an allocation methodology should be aware of certain limitations associated with the use of such an approach. Specifically, the agencies will not permit a DI to accept an allocation of operational risk capital requirements that includes non-DIs. Unlike the cross-guarantee provision of the Federal Deposit Insurance Act, which provides that a DI is liable for any losses incurred by the FDIC in connection with the failure of a commonly-controlled DI, there are no statutory provisions requiring cross-guarantees between a DI and its non-DI affiliates.
A bank must have data management and maintenance systems that adequately support all aspects of the bank's advanced IRB systems, operational risk management processes, operational risk data and assessment systems, operational risk quantification systems, and, to the extent the bank uses the following systems, the internal models methodology, the double default excessive correlation detection process, the IMA for equity exposures, and the IAA for securitization exposures to ABCP programs (collectively, advanced systems).
The bank's data management and maintenance systems must adequately support the timely and accurate reporting of risk-based capital requirements. Specifically, a bank must retain sufficient data elements related to key risk drivers to permit monitoring, validation, and refinement of the bank's advanced systems. A bank's data management and maintenance systems should generally support the rule's qualification requirements relating to quantification, validation, and control and oversight mechanisms, as well as the bank's broader risk management and reporting needs. The precise data elements to be collected are dictated by the features and methodologies of the risk measurement and management systems employed by the bank. To meet the significant data management challenges presented by the quantification, validation, and control and oversight requirements of the advanced approaches, a bank must retain data in an electronic format that allows timely retrieval for analysis, reporting, and disclosure purposes. The agencies did not receive any material comments on these data management requirements.
The consequences of an inaccurate or unreliable advanced system can be significant, particularly regarding the calculation of risk-based capital requirements. Accordingly, bank senior management is responsible for ensuring that all advanced systems function effectively and comply with the qualification requirements.
Under the proposed rule, a bank's board of directors (or a designated committee of the board) would at least annually evaluate the effectiveness of, and approve, the bank's advanced systems. Multiple commenters objected to this requirement. Commenters suggested that a bank's board of directors should have more narrowly defined responsibilities, and that evaluation of a bank's advanced systems would be more effectively and appropriately accomplished by senior management.
The agencies believe that a bank's board of directors has ultimate accountability for the effectiveness of the bank's advanced systems. However, the agencies agree that it is not necessarily the responsibility of a bank's board of directors to conduct an evaluation of the effectiveness of a bank's advanced systems. Evaluation may include transaction testing, validation, and audit activities more appropriately the responsibility of senior management. Accordingly, the final rule requires a bank's board of directors to review the effectiveness of, and approve, the bank's advanced systems at least annually.
To support senior management's and the board of directors” oversight responsibilities, a bank must have an effective system of controls and oversight that ensures ongoing compliance with the qualification requirements; maintains the integrity, reliability, and accuracy of the bank's advanced systems; and includes adequate corporate governance and project management processes. Banks have flexibility to determine how to achieve integrity in their risk management systems. Banks are, however, expected to follow standard control principles in their systems such as checks and balances, separation of duties, appropriateness of incentives, and data integrity assurance, including that of information purchased from third parties. Moreover, the oversight process should be sufficiently independent of the advanced systems” development, implementation, and operation to ensure the integrity of the component systems. The objective of risk management system oversight is to ensure that the various systems used in determining risk-based capital requirements are operating as intended. The oversight process should draw conclusions on the soundness of the components of the risk management system, identify errors and flaws, and recommend corrective action as appropriate.
A bank must validate its advanced systems on an ongoing basis. Validation is the set of activities designed to give the greatest possible assurances of accuracy of the advanced systems. Validation includes three broad components: (i) Evaluation of the conceptual soundness of the advanced systems; (ii) ongoing monitoring that includes process verification and comparison of the bank's internal estimates with relevant internal and external data sources or results from other estimation techniques (benchmarking); and (iii) outcomes analysis that includes back-testing.
Each of these three components of validation must be applied to the bank's risk rating and segmentation systems, risk parameter quantification processes, and internal models that are part of the bank's advanced systems. A sound validation process should take business cycles into account, and any adjustments for stages of the economic cycle should be clearly specified in advance and fully documented as part of the validation policy. Senior management of the bank should be notified of the validation results and should take corrective action where appropriate.
A bank's validation process must be independent of the advanced systems’ development, implementation, and operation, or be subject to independent assessment of its adequacy and effectiveness. A bank should ensure that individuals who perform the review are not biased in their assessment due to their involvement in the development, implementation, or operation of the processes or products. For example, reviews of the internal risk rating and segmentation systems should be performed by individuals who were not part of the development, implementation, or maintenance of those systems. In addition, individuals performing the reviews should possess the requisite technical skills and expertise to fulfill their mandate.
The first component of validation is evaluating conceptual soundness, which involves assessing the quality of the design and construction of a risk measurement or management system. This evaluation of conceptual soundness should include documentation and empirical evidence supporting the methods used and the variables selected in the design and quantification of the bank's advanced systems. The documentation should also evidence an understanding of the systems’ limitations. The development of internal risk rating and segmentation systems and their quantification processes requires banks to exercise judgment. Validation should ensure that these judgments are well informed and considered, and generally include a body of expert opinion. A bank should review developmental evidence whenever the bank makes material changes in its advanced systems.
The second component of the validation process for a bank's advanced systems is ongoing monitoring to confirm that the systems were implemented appropriately and continue to perform as intended. Such monitoring involves process verification and benchmarking. Process verification includes verifying that internal and external data are accurate and complete, as well as ensuring that: Internal risk rating and segmentation systems are being used, monitored, and updated as designed; ratings are assigned to wholesale obligors and exposures as intended; and appropriate remediation is undertaken if deficiencies exist.
Benchmarking means the comparison of a bank's internal estimates with relevant internal and external data or with estimates based on other estimation techniques. Banks are required to use alternative data sources or risk assessment approaches to draw inferences about the validity of their internal risk ratings, segmentations, risk parameter estimates, and model outputs on an ongoing basis. For credit risk ratings, examples of alternative data sources include independent internal raters (such as loan review), external rating agencies, wholesale and retail credit risk models developed independently, or retail credit bureau models. Because it may take considerable time before outcomes with which to conduct sufficiently robust backtesting are available, benchmarking will be a very important validation device. Benchmarking applies to all quantification processes and internal risk rating and segmentation activities.
Benchmarking allows a bank to compare its estimates with those of other estimation techniques and data sources. Results of benchmarking exercises can be a valuable diagnostic tool in identifying potential weaknesses in a bank's risk quantification system. While benchmarking activities allow for inferences about the appropriateness of the quantification processes and internal risk rating and segmentation systems, they are not the same as backtesting. Differences observed between the bank's risk estimates and the benchmark do not necessarily indicate that the internal risk ratings, segmentation decisions, or risk parameter estimates are in error. The benchmark itself is an alternative prediction, and the difference may be due to different data or methods. As part of the benchmarking exercise, the bank should investigate the source of the differences and whether the extent of the differences is appropriate.
The third component of the validation process is outcomes analysis, which is the comparison of the bank's forecasts of risk parameters and other model outputs with actual outcomes. A bank's outcomes analysis must include backtesting, which is the comparison of the bank's forecasts generated by its internal models with actual outcomes during a sample period not used in model development. In this context, backtesting is one form of out-of-sample testing. The agencies note that in other contexts backtesting may refer to in-sample fit, but in-sample fit analysis is not what the rule requires a bank to do as part of the advanced approaches validation process.
Actual outcomes should be compared with expected ranges around the estimated values of the risk parameters and model results. Randomness and many other variables will make discrepancies between realized outcomes and the estimated risk parameters inevitable. Therefore the expected ranges should take into account relevant elements of a bank's internal risk rating or segmentation processes. For example, depending on the bank's rating philosophy, year-by-year realized default rates may be expected to differ significantly from the long-run one-year average. Also, changes in economic conditions between the historical data and current period can lead to differences between actual outcomes and estimates.
One commenter asserted that requiring a bank to perform a statistically robust form of backtesting would be an impractically high standard for AMA qualification given the nature of operational risk. The commenter further claimed that validating an operational risk model must rely on the robustness of the logical structure of the model and the appropriateness of the resultant operational risk exposure when benchmarked against other established reference points.
The agencies recognize that it may take considerable time before actual outcomes outside of the sample period used in model development are available that would allow a bank to backtest its operational risk models by comparing its internal estimates with these outcomes. The agencies also acknowledge that a bank may be unable to backtest an operational risk model with the same degree of statistical precision that it is able to backtest an internal market risk model. When a bank's backtesting process is not sufficiently robust, a bank may need to rely more heavily on benchmarking and other alternative validation devices. The agencies maintain, however, that backtesting provides important feedback on the accuracy of model outputs and that a bank should be able to assess how actual losses compare with estimates previously generated by its model.
A bank must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the bank's advanced systems. Internal audit should review the validation process, including validation procedures, responsibilities, results, timeliness, and responsiveness to findings. Further, internal audit should evaluate the depth, scope, and quality of the risk management system review process and conduct appropriate testing to ensure that the conclusions of these reviews are well founded. Internal audit must report its findings at least annually to the bank's board of directors (or a committee thereof).
A bank must periodically stress test its advanced systems. Stress testing analysis is a means of understanding how economic cycles, especially downturns as described by stress scenarios, affect risk-based capital requirements, including migration across rating grades or segments and the credit risk mitigation benefits of double default treatment. Stress testing analysis consists of identifying stress scenarios and then assessing the effects of the scenarios on key performance measures, including risk-based capital requirements. Under the rule, changes in borrower credit quality will lead to changes in risk-based capital requirements. Because credit quality changes typically reflect changing economic conditions, risk-based capital requirements may also vary with the economic cycle. During an economic downturn, risk-based capital requirements will increase if wholesale obligors or retail exposures migrate toward lower credit quality rating grades or segments.
Supervisors expect banks to manage their regulatory capital position so that they remain at least adequately capitalized during all phases of the economic cycle. A bank that credibly estimates regulatory capital levels during a downturn can be more confident of appropriately managing regulatory capital.
Banks should use a range of plausible but severe scenarios and methods when stress testing to manage regulatory capital. Scenarios may be historical, hypothetical, or model-based. Key variables specified in a scenario may include, for example, interest rates, transition matrices (ratings and score-
The scope of stress testing analysis should be broad and include all material portfolios. The time horizon of the analysis should be consistent with the specifics of the scenario and should be long enough to measure the material effects of the scenario on key performance measures. For example, if a scenario such as a historical recession has material income and segment or ratings migration effects over two years, the appropriate time horizon is at least two years.
A bank must adequately document all material aspects of its advanced systems, including but not limited to the internal risk rating and segmentation systems, risk parameter quantification processes, model design, assumptions, and validation results. The guiding principle governing documentation is that it should support the requirements for the quantification, validation, and control and oversight mechanisms as well as the bank's broader risk management and reporting needs. Documentation is also critical to the supervisory oversight process.
The bank should document the rationale for all material assumptions underpinning its chosen analytical frameworks, including the choice of inputs, distributional assumptions, and weighting of quantitative and qualitative elements. The bank also should document and justify any subsequent changes to these assumptions.
A bank using the advanced approaches must meet the qualification requirements on an ongoing basis. Banks are expected to improve their advanced systems as they improve data gathering capabilities and as industry practice evolves. To facilitate the supervisory oversight of systems changes, a bank must notify its primary Federal supervisor when it makes a change to its advanced systems that results in a material change in the bank's risk-weighted asset amount for an exposure type, or when the bank makes any significant change to its modeling assumptions.
If an agency determines that a bank that uses the advanced approaches to calculate its risk-based capital requirements has fallen out of compliance with one or more of the qualification requirements, the agency will notify the bank of its failure to comply. After receiving such notice, a bank must establish and submit a plan satisfactory to its primary Federal supervisor to return to compliance. If the bank's primary Federal supervisor determines that the bank's risk-based capital requirements are not commensurate with the bank's credit, market, operational, or other risks, it may require the bank to calculate its risk-based capital requirements using the general risk-based capital rules or a modified form of the advanced approaches (for example, with fixed supervisory risk parameters).
Under the proposed rule, a bank that fell out of compliance with the qualification requirements would also be required to disclose publicly its noncompliance with the qualification requirements promptly after receiving notice of noncompliance from its primary Federal supervisor. Commenters objected to this requirement, noting that it is not one of the public disclosure requirements of the New Accord. The agencies have determined that the public disclosure of noncompliance is not always necessary, because the disclosure may not reflect the degree of noncompliance. Therefore, the agencies are not including a general noncompliance disclosure requirement in the final rule. However, the agencies acknowledge that a bank's significant noncompliance with the qualification requirements is an important factor in market participants’ assessments of the bank's risk profile and, thus, a primary Federal supervisor may require public disclosure of noncompliance with the qualification requirements if such noncompliance is significant.
Due to the advanced approaches’ rigorous systems requirements, a bank that merges with or acquires another company might not be able to quickly integrate the merged or acquired company's exposures into its risk-based capital calculations. The proposed rule provided transition provisions that would allow the acquiring bank time to integrate the merged or acquired company into its advanced approaches, subject to an implementation plan submitted to the bank's primary Federal supervisor. As proposed, the transition provisions applied only to banks that had already qualified to use the advanced approaches. The agencies recognize, however, that a bank in the process of qualifying to use the advanced approaches may merge with or acquire a company and need time to integrate the company into its advanced approaches on an implementation schedule distinct from its original implementation plan. In the final rule, the agencies are therefore allowing banks to take advantage of the proposed rule's transition provisions for mergers and acquisitions both before and after they qualify to use the advanced approaches.
Under the proposed rule, a bank could use the transition provisions for the merged or acquired company's exposures for up to 24 months following the calendar quarter during which the merger or acquisition consummates. A bank's primary Federal supervisor could extend the transition period for up to an additional 12 months. Commenters generally supported this timeframe and associated supervisory flexibility. Therefore, the final rule adopts the proposed rule's merger and acquisition transition timeframe without change.
To take advantage of the merger and acquisition transition provisions, the acquiring bank must submit to its primary Federal supervisor an implementation plan for using the advanced approaches for the merged or acquired company. The proposed rule required a bank to submit such a plan within 30 days of consummating the merger or acquisition. Many commenters asserted that the 30-day timeframe for submission of an implementation plan may be too short, particularly given the many integration activities that must take place immediately following the consummation of a merger or acquisition. These commenters generally suggested that banks instead be given 90 or 180 days to submit the implementation plan. The agencies agree with these commenters that the proposed timeframe for submitting an implementation plan may be too short. Accordingly, the final rule requires a bank to submit an implementation plan within 90 days of the consummation of a merger or acquisition.
Under the final rule, if a bank that uses the advanced approaches to calculate risk-based capital requirements merges with or acquires a company that does not calculate risk-based capital requirements using the advanced approaches, the acquiring bank may use the general risk-based capital rules to compute the risk-weighted assets and associated capital
Similarly, a core or opt-in bank that merges with or acquires another core or opt-in bank might not be able to apply its systems for the advanced approaches immediately to the acquired bank's exposures. Accordingly, the final rule permits a core or opt-in bank that merges with or acquires another core or opt-in bank to use the acquired bank's advanced approaches to determine the risk-weighted asset amounts for, and deductions from capital associated with, the acquired bank's exposures during the merger and acquisition transition timeframe.
A third potential merger or acquisition scenario is a bank subject to the general risk-based capital rules that merges with or acquires a bank that uses the advanced approaches. If, after the merger or acquisition, the acquiring bank is not a core bank, it could choose to opt in to the advanced approaches or to apply the general risk-based capital rules to the consolidated bank. If the acquiring bank chooses to remain on the general risk-based capital rules, the bank must immediately apply the general risk-based capital rules to all its exposures, including those of the acquired bank.
If the acquiring bank chooses or is required to move to the advanced approaches, however, it could apply the advanced approaches to the acquired exposures (provided that it continues to meet all of the qualification requirements for those exposures) for up to 24 months (with a potential 12-month extension) while it completes the process of qualifying to use the advanced approaches for the entire bank. If the acquiring bank has not begun implementing the advanced approaches at the time of the merger or acquisition, it may instead use the transition timeframes described in section III.A. of the preamble and section 21 of the final rule. In the latter case, the bank must consult with its primary Federal supervisor regarding the appropriate risk-based capital treatment of the acquired exposures. In no case may a bank permanently apply the advanced approaches only to an acquired bank's exposures and not to the consolidated bank.
Because eligible credit reserves and the ALLL are treated differently under the general risk-based capital rules and the advanced approaches, the final rule specifies how the acquiring bank must treat the general allowances associated with the merged or acquired company's exposures during the period when the general risk-based capital rules apply to the acquiring bank. Specifically, ALLL associated with the exposures of the merged or acquired company may not be directly included in the acquiring bank's tier 2 capital. Rather, any excess eligible credit reserves (that is, eligible credit reserves minus total expected credit losses) associated with the merged or acquired company's exposures may be included in the acquiring bank's tier 2 capital up to 0.6 percent of the credit-risk-weighted assets associated with those exposures.
The final rule maintains the minimum risk-based capital ratio requirements of 4.0 percent tier 1 capital to total risk-weighted assets and 8.0 percent total qualifying capital to total risk-weighted assets. A bank's total qualifying capital is the sum of its tier 1 (core) capital elements and tier 2 (supplemental) capital elements, subject to various limits and restrictions, minus certain deductions (adjustments). The agencies are not restating the elements of tier 1 and tier 2 capital in the final rule. Those capital elements generally remain as they are currently in the general risk-based capital rules.
Under the final rule, consistent with the proposal, after identifying the elements of tier 1 and tier 2 capital, a bank must make certain adjustments to determine its tier 1 capital and total qualifying capital (the numerator of the total risk-based capital ratio). Some of these adjustments are made only to the tier 1 portion of the capital base. Other adjustments are made 50 percent from tier 1 capital and 50 percent from tier 2 capital.
Under the final rule, as under the proposal, a bank must deduct from tier 1 capital goodwill, other intangible assets, and deferred tax assets to the same extent that those assets are deducted from tier 1 capital under the general risk-based capital rules. Thus, all goodwill is deducted from tier 1 capital. Certain intangible assets—including mortgage servicing assets, non-mortgage servicing assets, and purchased credit card relationships—that meet the conditions and limits in the general risk-based capital rules do not have to be deducted from tier 1 capital. Likewise, deferred tax assets that are dependent upon future taxable income and that meet the valuation requirements and limits in the general risk-based capital rules do not have to be deducted from tier 1 capital.
Under the general risk-based capital rules, a bank also must deduct from its
A number of commenters urged the agencies to revisit the existing definitions of tier 1 and tier 2 capital, including some of the deductions. Some offered specific suggestions, such as removing the requirement to deduct goodwill from tier 1 capital or revising the limitations on certain capital instruments that may be included in regulatory capital. Other commenters noted that the definition of regulatory capital and related deductions should be thoroughly debated internationally before changes are made in any one national jurisdiction. The agencies believe that the definition of regulatory capital should be as consistent as possible across national jurisdictions. The BCBS has formed a working group that is currently looking at issues related to the definition of regulatory capital. Accordingly, the agencies have not modified the existing definition of regulatory capital and related deductions at this time, other than with respect to implementation of the advanced approaches.
Under the general risk-based capital rules, a bank is allowed to include in tier 2 capital its ALLL up to 1.25 percent of risk-weighted assets (net of certain deductions). Amounts of ALLL in excess of this limit are deducted from the gross amount of risk-weighted assets.
Under the proposed rule, the ALLL was treated differently. The proposed rule included a methodology for adjusting risk-based capital requirements based on a comparison of the bank's eligible credit reserves to its ECL. The proposed rule defined eligible credit reserves as all general allowances, including the ALLL, established through a charge against earnings to absorb credit losses associated with on-or off-balance sheet wholesale and retail exposures. As proposed, eligible credit reserves did not include allocated transfer risk reserves established pursuant to 12 U.S.C. 3904
The proposed rule defined a bank's total ECL as the sum of ECL for all wholesale and retail exposures other than exposures to which the bank applied the double default treatment (described below). The bank's ECL for a wholesale exposure to a non-defaulted obligor or a non-defaulted retail segment was equal to the product of PD, ELGD, and EAD for the exposure or segment. The ECL for non-defaulted exposures thus reflected expected economic losses, including the cost of carry and direct and indirect workout expenses. The bank's ECL for a wholesale exposure to a defaulted obligor or a defaulted retail segment was equal to the bank's impairment estimate for allowance purposes for the exposure or segment. The ECL for defaulted exposures thus was based on accounting measures of credit loss incorporated into a bank's charge-off and reserving practices.
In the proposal, the agencies solicited comment on a possible alternative treatment for determining ECL for a defaulted exposure that would be more consistent with the proposed treatment of ECL for non-defaulted exposures. That alternative approach calculated ECL as the bank's current carrying value of the exposure multiplied by the bank's best estimate of the expected economic loss rate associated with the exposure (measured relative to the current carrying value). Commenters on this issue generally supported the proposed treatment and expressed some concern about the added complexity of the alternative treatment.
The agencies believe that, for defaulted exposures, any difference between a bank's best estimate of economic losses and its impairment estimate for ALLL purposes is likely to be small. The agencies also believe that the proposed ALLL impairment approach is less burdensome for banks than the “best estimate of economic loss” approach. As a result, the agencies are retaining this aspect of the proposed definition of ECL for defaulted exposures. The agencies recognize that this treatment requires a bank to specify how much of its ALLL is attributable to defaulted exposures, and emphasize that a bank must capture all material economic losses on defaulted exposures when building its databases for estimating LGDs for non-defaulted exposures.
The agencies also sought comment on the appropriate measure of ECL for assets held at fair value with gains and losses flowing through earnings. Commenters expressed the view that there should be no ECL for such assets because expected losses on such assets already have been removed from regulatory capital. The agencies agree with this position and, therefore, under the final rule, a bank may assign an ECL of zero to assets held at fair value with gains and losses flowing through earnings. The agencies are otherwise maintaining the proposed definition of ECL in the final rule, with the substitution of LGD for ELGD noted above.
Under the final rule, consistent with the proposal, a bank must compare the total dollar amount of its ECL to its eligible credit reserves. If there is a shortfall of eligible credit reserves compared to total ECL, the bank must deduct 50 percent of the shortfall from tier 1 capital and 50 percent from tier 2 capital. If eligible credit reserves exceed total ECL, the excess portion of eligible credit reserves may be included in tier 2 capital up to 0.6 percent of credit-risk-weighted assets.
A number of commenters objected to the 0.6 percent limit on inclusion of excess reserves in tier 2 capital and suggested that there should be a higher or no limit on the amount of excess reserves that may be included in regulatory capital. While the 0.6 percent limit is part of the New Accord, some commenters asserted that this limitation would put U.S. banks at a competitive disadvantage because U.S. accounting practices (as compared to accounting practices in many other countries) lead to higher reserves that are more likely to exceed the limitation. Another commenter asserted that the proposed limitation on excess reserves is more restrictive than the current cap on ALLL in the general risk-based capital rules. Finally, several commenters suggested that because ALLL is the first buffer against credit losses, it should be included without limit in tier 1 capital.
The agencies believe that the proposed 0.6 percent limit on inclusion of excess reserves in tier 2 capital is roughly equivalent to the 1.25 percent cap in the general risk-based capital rules and serves to maintain general consistency in the treatment of reserves
Under the proposed rule, a bank would deduct from tier 1 capital any after-tax gain-on-sale. Gain-on-sale was defined as an increase in a bank's equity capital that resulted from a securitization, other than an increase in equity capital that resulted from the bank's receipt of cash in connection with the securitization. The agencies designed this deduction to offset accounting treatments that produce an increase in a bank's equity capital and tier 1 capital at the inception of a securitization—for example, a gain attributable to a CEIO that results from Financial Accounting Standard (FAS) 140 accounting treatment for the sale of underlying exposures to a securitization special purpose entity (SPE). Over time, as the bank, from an accounting perspective, realizes the increase in equity capital and tier 1 capital booked at the inception of the securitization through actual receipt of cash flows, the amount of the required deduction would shrink accordingly.
Under the general risk-based capital rules,
Under the proposed rule, certain other securitization exposures also would be deducted from tier 1 and tier 2 capital. These exposures included, for example, securitization exposures with an applicable external rating (defined below) that is more than one category below investment grade (for example, below BB-) and most subordinated unrated securitization exposures. When a bank deducted a securitization exposure (other than gain-on-sale) from regulatory capital, the bank would take the deduction 50 percent from tier 1 capital and 50 percent from tier 2 capital. Moreover, under the proposal, a bank could calculate any deductions from tier 1 and tier 2 capital with respect to a securitization exposure (including after-tax gain-on-sale) net of any deferred tax liabilities associated with the exposure.
The agencies received a number of comments on the proposed securitization-linked deductions. In particular, some commenters urged the agencies to retain the general risk-based capital rule for deducting only CEIOs that exceed 25 percent of tier 1 capital. Some of these commenters noted that the “harsher” securitization-linked deductions under the advanced approaches could have a significant tier 1 capital impact and, accordingly, could have an unwarranted effect on a bank's tier 1 leverage ratio calculation. A few commenters encouraged the agencies to permit a bank to replace the deduction approach for certain securitization exposures with a 1,250 percent risk weight approach, in part to mitigate potential tier 1 leverage ratio effects.
The agencies are retaining the securitization-related deductions as proposed. The proposed deductions are part of the New Accord's securitization framework. The agencies believe that they should be retained to foster consistency among participants in the international securitization markets.
The proposed rule also required a bank to deduct the bank's exposure on certain unsettled and failed capital markets transactions 50 percent from tier 1 capital and 50 percent from tier 2 capital. The agencies are retaining this deduction as proposed.
The agencies are also retaining, as proposed, the deductions in the general risk-based capital rules for investments in unconsolidated banking and finance subsidiaries and reciprocal holdings of bank capital instruments. Further, the agencies are retaining the current treatment for national and state banks that control or hold an interest in a financial subsidiary. As required by the Gramm-Leach-Bliley Act, assets and liabilities of the financial subsidiary are not consolidated with those of the bank for risk-based capital purposes and the bank must deduct its equity investment (including retained earnings) in the financial subsidiary from regulatory capital—50 percent from tier 1 capital and 50 percent from tier 2 capital.
For BHCs with consolidated insurance underwriting subsidiaries that are functionally regulated by a State insurance regulator (or subject to comparable supervision and regulatory capital requirements in a non-U.S. jurisdiction), the proposed rule set forth the following treatment. The assets and liabilities of the subsidiary would be consolidated for purposes of determining the BHC's risk-weighted assets. However, the BHC would deduct from tier 1 capital an amount equal to the insurance underwriting subsidiary's minimum regulatory capital requirement as determined by its functional (or equivalent) regulator. For U.S. regulated insurance underwriting subsidiaries, this amount generally would be 200 percent of the subsidiary's Authorized Control Level as established by the appropriate state insurance regulator.
The proposal noted that its approach with respect to functionally regulated consolidated insurance underwriting subsidiaries was different from the New Accord, which broadly endorses a deconsolidation and deduction approach for insurance subsidiaries. The proposal acknowledged the Board's concern that a full deconsolidation and deduction approach does not capture the credit risk in insurance underwriting subsidiaries at the consolidated BHC level.
Several commenters objected to the proposed deduction from tier 1 capital and instead supported a deduction 50 percent from tier 1 capital and 50 percent from tier 2 capital. Others supported the full deduction and deconsolidation approach endorsed by the New Accord and maintained that, by contrast, the proposed approach was overly conservative and resulted in a double-count of capital requirements for insurance regulation and banking regulation.
The Board continues to believe that a consolidated BHC risk-based capital measure should incorporate all credit, market, and operational risks to which the BHC is exposed, regardless of the
Thus, the Board is retaining the proposed requirement that assets and liabilities of insurance underwriting subsidiaries are consolidated for determining risk-weighted assets. The Board has modified the final rule for BHCs, however, to allow the associated capital deduction to be made 50 percent from tier 1 capital and 50 percent from tier 2 capital.
Under the final rule, a bank's total risk-weighted assets is the sum of its credit risk-weighted assets and risk-weighted assets for operational risk, minus the sum of its excess eligible credit reserves (eligible credit reserves in excess of its total ECL) not included in tier 2 capital. Unlike under the proposal, allocated transfer risk reserves are not subtracted from total risk-weighted assets under the final rule. Because the EAD of wholesale exposures and retail segments is calculated net of any allocated transfer risk reserves, a second subtraction of the reserves from risk-weighted assets is not appropriate.
To calculate credit risk-weighted assets, a bank must determine risk-weighted asset amounts for exposures that have been grouped into four general categories: wholesale, retail, securitization, and equity. It must also identify and determine risk-weighted asset amounts for assets not included in an exposure category and any non-material portfolios of exposures to which the bank elects not to apply the IRB approach. To exclude a portfolio from the IRB approach, a bank must demonstrate to the satisfaction of its primary Federal supervisor that the portfolio (when combined with all other portfolios of exposures that the bank seeks to exclude from the IRB approach) is not material to the bank. As described above, credit-risk-weighted assets is defined as 1.06 multiplied by the sum of total wholesale and retail risk-weighted assets, risk-weighted assets for securitization exposures, and risk-weighted assets for equity exposures.
Consistent with the proposed rule, the final rule defines a wholesale exposure as a credit exposure to a company, individual, sovereign entity, or other governmental entity (other than a securitization exposure, retail exposure, or equity exposure).
The agencies proposed two subcategories of wholesale exposures—HVCRE exposures and non-HVCRE exposures. Under the proposed rule, HVCRE exposures would be subject to a separate IRB risk-based capital formula that would produce a higher risk-based capital requirement for a given set of risk parameters than the IRB risk-based capital formula for non-HVCRE wholesale exposures. Further, the agencies proposed that once an exposure was determined to be an HVCRE exposure, it would remain an HVCRE exposure until paid in full, sold, or converted to permanent financing.
The proposed rule defined an HVCRE exposure as a credit facility that finances or has financed the acquisition, development, or construction of real property, excluding facilities that finance (i) one-to four-family residential properties or (ii) commercial real estate projects that meet the following conditions: (A) The exposure's loan-to-value (LTV) ratio is less than or equal to the applicable maximum supervisory LTV ratio in the real estate lending standards of the agencies;
Several commenters raised issues related to the requirement that banks must separate HVCRE exposures from other wholesale exposures. One commenter asserted that a separate risk-weight function for HVCRE exposures is unnecessary because the higher risk associated with such exposures would be reflected in higher PDs and LGDs. Other commenters stated that tracking the exception requirements for acquisition, development, or construction loans would be burdensome and expressed concern that all multifamily loans could be subject to the HVCRE treatment. Yet other commenters requested that the agencies exclude from the definition of HVCRE all multifamily acquisition, development, or construction loans; additional commercial real estate exposures; and other exposures with significant project equity and/or pre-sale commitments. A few commenters supported the proposed approach to HVCRE exposures.
The agencies have determined that the proposed definition of HVCRE exposures strikes an appropriate balance between risk-sensitivity and simplicity.
The New Accord identifies five sub-classes of specialized lending for which the primary source of repayment of the obligation is the income generated by the financed asset(s) rather than the independent capacity of a broader commercial enterprise. The sub-classes are project finance, object finance, commodities finance, income-producing real estate, and HVCRE. The New Accord provides a methodology to accommodate banks that cannot meet the requirements for the estimation of PD for these exposure types. The proposed rule did not include a separate treatment for specialized lending beyond the separate IRB risk-based capital formula for HVCRE exposures specified in the New Accord. The agencies noted in the proposal that sophisticated banks that would be applying the advanced approaches in the United States should be able to estimate risk parameters for specialized lending. The agencies continue to believe that banks using the advanced approaches in the United States should be able to estimate risk parameters for specialized lending and, therefore, have not adopted a separate treatment for specialized lending in the final rule.
In contrast to the New Accord, the agencies did not propose a separate risk-based capital function for exposures to small- and medium-size enterprises (SMEs). The SME function in the New Accord generates a lower risk-based capital requirement for an exposure to an SME than for an exposure to a larger firm that has the same risk parameter values. The agencies were not aware of compelling evidence that smaller firms are subject to less systematic risk than is already reflected in the wholesale exposure risk-based capital formula, which specifies lower AVCs as PDs increase.
A number of commenters objected to this aspect of the proposal and urged the agencies to include in the final rule the SME risk-based capital function from the New Accord. Several commenters expressed concern about potential competitive disparities in the market for SME lending between U.S. banks and foreign banks subject to rules that include the New Accord's treatment of SME exposures. Others asserted that lower AVCs and risk-based capital requirements were appropriate for SME exposures because the asset values of exposures to smaller firms are more idiosyncratic than those of exposures to larger firms.
While commenters raised important issues related to SME exposures, the agencies have decided not to add a distinct risk-weight function for such exposures to the final rule. The agencies continue to believe that a distinct risk-weight function with a lower AVC for SME exposures is not substantiated by sufficient empirical evidence and may give rise to a domestic competitive inequity between banks subject to the advanced approaches and banks subject to the general risk-based capital rules.
Under the final rule, as under the proposed rule, retail exposures generally include exposures (other than securitization exposures or equity exposures) to an individual and small exposures to businesses that are managed as part of a segment of similar exposures, not on an individual-exposure basis. There are three subcategories of retail exposure: (i) Residential mortgage exposures; (ii) QREs; and (iii) other retail exposures. The final rule retains the proposed definitions of the retail exposure subcategories and, thus, defines residential mortgage exposure as an exposure that is primarily secured by a first or subsequent lien on one- to four-family residential property.
QREs are defined as exposures to individuals that are (i) revolving, unsecured, and unconditionally cancelable by the bank to the fullest extent permitted by Federal law; (ii) have a maximum exposure amount (drawn plus undrawn) of up to $100,000; and (iii) are managed as part of a segment of exposures with homogeneous risk characteristics. In practice, QREs typically include exposures where customers' outstanding borrowings are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the bank. Most credit card exposures to individuals and overdraft lines on individual checking accounts are QREs.
The category of other retail exposures includes two types of exposures. First, all exposures to individuals for non-business purposes (other than residential mortgage exposures and QREs) that are managed as part of a segment of similar exposures are other retail exposures. Such exposures may include personal term loans, margin loans, auto loans and leases, credit card accounts with credit lines above $100,000, and student loans. There is no upper limit on the size of these types of retail exposures to individuals. Second, exposures to individuals or companies for business purposes (other than residential mortgage exposures and QREs), up to a single-borrower exposure threshold of $1 million, that are managed as part of a segment of similar exposures are other retail exposures. For the purpose of assessing exposure to a single borrower, the bank must aggregate all business exposures to a particular legal entity and its affiliates that are consolidated under GAAP. If that borrower is a natural person, any consumer loans (for example, personal credit card loans or mortgage loans) to that borrower would not be part of the aggregate. A bank could distinguish a consumer loan from a business loan by the loan department through which the loan is made. Exposures to a borrower for business purposes primarily secured by residential property count toward the $1 million single-borrower other retail business exposure threshold.
The residual value portion of a retail lease exposure is excluded from the definition of an other retail exposure. Consistent with the New Accord, a bank must assign the residual value portion
The proposed rule defined a securitization exposure as an on-balance sheet or off-balance sheet credit exposure that arises from a traditional or synthetic securitization (including credit-enhancing representations and warranties). A traditional securitization was defined as a transaction in which (i) all or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees; (ii) the credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (iii) performance of the securitization exposures depends on the performance of the underlying exposures; and (iv) all or substantially all of the underlying exposures are financial exposures. Examples of financial exposures are loans, commitments, receivables, asset-backed securities, mortgage-backed securities, other debt securities, equity securities, or credit derivatives. The proposed rule also defined mortgage-backed pass-through securities guaranteed by Fannie Mae or Freddie Mac (whether or not issued out of a structure that tranches credit risk) as securitization exposures.
A synthetic securitization was defined as a transaction in which (i) all or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure); (ii) the credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (iii) performance of the securitization exposures depends on the performance of the underlying exposures; and (iv) all or substantially all of the underlying exposures are financial exposures. Accordingly, the proposed definition of a securitization exposure included tranched cover or guarantee arrangements—that is, arrangements in which an entity transfers a portion of the credit risk of an underlying exposure to one or more guarantors or credit derivative providers but also retains a portion of the credit risk, where the risk transferred and the risk retained are of different seniority levels.
The preamble to the proposal noted that, provided there is a tranching of credit risk, securitization exposures could include, among other things, asset-backed and mortgage-backed securities; loans, lines of credit, liquidity facilities, and financial standby letters of credit; credit derivatives and guarantees; loan servicing assets; servicer cash advance facilities; reserve accounts; credit-enhancing representations and warranties; and CEIOs. Securitization exposures also could include assets sold with retained tranched recourse.
As explained in the proposal, if a bank purchases an asset-backed security issued by a securitization SPE and purchases a credit derivative to protect itself from credit losses associated with the asset-backed security, the purchase of the credit derivative by the investing bank does not turn the traditional securitization into a synthetic securitization. Instead, the investing bank would be viewed as having purchased a traditional securitization exposure and would reflect the CRM benefits of the credit derivative through the securitization CRM rules described later in the preamble and in section 46 of the rule. Moreover, if a bank provides a guarantee or a credit derivative on a securitization exposure, that guarantee or credit derivative would also be a securitization exposure.
Commenters raised several objections to the proposed definitions of traditional and synthetic securitizations. First, several commenters objected to the requirement that all or substantially all of the underlying exposures must be financial exposures. These commenters noted that the securitization market rapidly evolves and expands to cover new asset classes—such as intellectual property rights, project finance revenues, and entertainment royalties—that may or may not be financial assets. Commenters expressed particular concern that the proposed definitions may exclude from the securitization framework leases that include a material lease residual component.
The agencies believe that requiring all or substantially all of the underlying exposures for a securitization to be financial exposures creates an important boundary between the wholesale and retail frameworks, on the one hand, and the securitization framework, on the other hand. Accordingly, the agencies are maintaining this requirement in the final rule. The securitization framework was designed to address the tranching of the credit risk of financial exposures and was not designed, for example, to apply to tranched credit exposures to commercial or industrial companies or nonfinancial assets. Accordingly, under the final rule, a specialized loan to finance the construction or acquisition of large-scale projects (for example, airports and power plants), objects (for example, ships, aircraft, or satellites), or commodities (for example, reserves, inventories, precious metals, oil, or natural gas) generally is not a securitization exposure because the assets backing the loan typically are nonfinancial assets (the facility, object, or commodity being financed). In addition, although some structured transactions involving income-producing real estate or HVCRE can resemble securitizations, these transactions generally would not be securitizations because the underlying exposure would be real estate. Consequently, exposures resulting from the tranching of the risks of nonfinancial assets are not subject to the final rule's securitization framework, but generally are subject to the rules for wholesale exposures.
Based on their cash flow characteristics, for purposes of the final rule, the agencies would consider many of the asset classes identified by commenters including lease residuals and entertainment royalties—to be financial assets. Both the designation of exposures as securitization exposures and the calculation of risk-based capital requirements for securitization exposures will be guided by the economic substance of a transaction rather than its legal form.
Some commenters asserted that the proposal generally to define as securitization exposures all exposures involving credit risk tranching of underlying financial assets was too broad. The proposed definition captured many exposures these commenters did not consider to be securitization exposures, including tranched exposures to a single underlying financial exposure and exposures to many hedge funds and private equity funds. Commenters requested flexibility to apply the wholesale or equity framework (depending on the exposure) rather than the securitization framework to these exposures.
The agencies believe that a single, unified approach to dealing with the tranching of credit risk is important to create a level playing field across the securitization, credit derivative, and other financial markets, and therefore have decided to maintain the proposed treatment of tranched exposures to a
The agencies agree with commenters that the proposed definition for securitization exposures was quite broad and captured some exposures that would more appropriately be treated under the wholesale or equity frameworks. To limit the scope of the IRB securitization framework, the agencies have modified the definition of traditional securitization in the final rule to make clear that operating companies are not traditional securitizations (even if all or substantially all of their assets are financial exposures). For purposes of the final rule's definition of traditional securitization, operating companies generally are companies that produce goods or provide services beyond the business of investing, reinvesting, holding, or trading in financial assets. Examples of operating companies are depository institutions, bank holding companies, securities brokers and dealers, insurance companies, and non-bank mortgage lenders. Accordingly, an equity investment in an operating company, such as a bank, generally would be an equity exposure under the final rule; a debt investment in an operating company, such as a bank, generally would be a wholesale exposure under the final rule.
Investment firms, which generally do not produce goods or provide services beyond the business of investing, reinvesting, holding, or trading in financial assets, are not operating companies for purposes of the final rule and would not qualify for this general exclusion from the definition of traditional securitization. Examples of investment firms would include companies that are exempted from the definition of an investment company under section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)) by either section 3(c)(1) (15 U.S.C. 80a-3(c)(1)) or section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) of the Act.
The final definition of a traditional securitization also provides the primary Federal supervisor of a bank with discretion to exclude from the definition of traditional securitization investment firms that exercise substantially unfettered control over the size and composition of their assets, liabilities, and off-balance sheet transactions. The agencies will consider a number of factors in the exercise of this discretion, including an assessment of the investment firm's leverage, risk profile, and economic substance. This supervisory exclusion is intended to provide discretion to a bank's primary Federal supervisor to distinguish structured finance transactions, to which the securitization framework was designed to apply, from more flexible investment firms such as many hedge funds and private equity funds. Only investment firms that can easily change the size and composition of their capital structure, as well as the size and composition of their assets and off-balance sheet exposures, would be eligible for this exclusion from the definition of traditional securitization under this new provision. The agencies do not consider managed collateralized debt obligation vehicles, structured investment vehicles, and similar structures, which allow considerable management discretion regarding asset composition but are subject to substantial restrictions regarding capital structure, to have substantially unfettered control. Thus, such transactions meet the final rule's definition of traditional securitization.
The agencies also have added two additional exclusions to the definition of traditional securitization for small business investment companies (SBICs) and community development investment vehicles. As a result, a bank's equity investments in SBICs and community development equity investments generally are treated as equity exposures under the final rule.
The agencies remain concerned that the line between securitization exposures and non-securitization exposures may be difficult to draw in some circumstances. In addition to the supervisory exclusion from the definition of traditional securitization described above, the agencies have added a new component to the definition of traditional securitization to specifically permit a primary Federal supervisor to scope certain transactions into the securitization framework if justified by the economics of the transaction. Similar to the analysis for excluding an investment firm from treatment as a traditional securitization, the agencies will consider the economic substance, leverage, and risk profile of transactions to ensure that the appropriate IRB classification is made. The agencies will consider a number of factors when assessing the economic substance of a transaction including, for example, the amount of equity in the structure, overall leverage (whether on-or off-balance sheet), whether redemption rights attach to the equity investor, and the ability of the junior tranches to absorb losses without interrupting contractual payments to more senior tranches.
One commenter asked whether a bank could ignore the credit protection provided by a tranched guarantee for risk-based capital purposes and instead calculate the risk-based capital requirement for the guaranteed exposure as if the guarantee did not exist. The agencies believe that this treatment would be an appropriate application of the principle of conservatism discussed in section II.D. of this preamble and set forth in section 1(d) of the final rule.
As noted above, the proposed rule defined mortgage-backed pass-through securities guaranteed by Fannie Mae or Freddie Mac (whether or not issued out of a structure that tranches credit risk) as securitization exposures. The agencies have reconsidered this proposal and have concluded that a special treatment for these securities is inconsistent with the New Accord and would violate the fundamental credit-tranching-based nature of the definition of securitization exposures. The final rule therefore does not define all mortgage-backed pass-through securities guaranteed by Fannie Mae or Freddie Mac to be securitization exposures. As a result, those mortgage-backed securities that involve tranching of credit risk will be securitization exposures; those mortgage-backed securities that do not involve tranching of credit risk will not be securitization exposures.
A few commenters asserted that OTC derivatives with a securitization SPE as the counterparty should be excluded from the definition of securitization exposure and treated as wholesale exposures. The agencies believe that the securitization framework is the most appropriate way to assess the counterparty credit risk of such exposures because this risk is a tranched exposure to the credit risk of the underlying financial assets of the
The proposed rule defined an equity exposure to mean:
(i) A security or instrument whether voting or non-voting that represents a direct or indirect ownership interest in, and a residual claim on, the assets and income of a company, unless: (A) The issuing company is consolidated with the bank under GAAP; (B) the bank is required to deduct the ownership interest from tier 1 or tier 2 capital; (C) the ownership interest is redeemable; (D) the ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to pay periodic interest); or (E) the ownership interest is a securitization exposure.
(ii) A security or instrument that is mandatorily convertible into a security or instrument described in (i).
(iii) An option or warrant that is exercisable for a security or instrument described in (i).
(iv) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in (i). For example, a short position in an equity security or a total return equity swap would be characterized as an equity exposure.
The proposal noted that nonconvertible term or perpetual preferred stock generally would be considered wholesale exposures rather than equity exposures. Financial instruments that are convertible into an equity exposure only at the option of the holder or issuer also generally would be considered wholesale exposures rather than equity exposures provided that the conversion terms do not expose the bank to the risk of losses arising from price movements in that equity exposure. Upon conversion, the instrument would be treated as an equity exposure. In addition, the agencies note that unfunded equity commitments, which are commitments to make equity investments at a future date, meet the definition of an equity exposure.
Many commenters expressed support for the proposed definition of equity exposure, except for the proposed exclusion of equity investments in hedge funds and other leveraged investment vehicles, as discussed above. The agencies are adopting the proposed definition for equity exposures with one exception. They have eliminated in the final rule the exclusion of a redeemable ownership interest from the definition of equity exposure. The agencies believe that redeemable ownership interests, such as those in mutual funds and private equity funds, are most appropriately treated as equity exposures.
The agencies anticipate that, as a general matter, each of a bank's exposures will fit in one and only one exposure category. One exception to this principle is that equity derivatives generally will meet the definition of an equity exposure (because of the bank's exposure to the underlying equity security) and the definition of a wholesale exposure (because of the bank's credit risk exposure to the counterparty). In such cases, as discussed in more detail below, the bank's risk-based capital requirement for the equity derivative generally is the sum of its risk-based capital requirement for the derivative counterparty credit risk and for the underlying exposure.
With the introduction of an explicit risk-based capital requirement for operational risk, issues arise about the proper treatment of operational losses that also could be attributed to either credit risk or market risk. The agencies recognize that these boundary issues are important and have significant implications for how banks must compile loss data sets and compute risk-based capital requirements under the final rule. Consistent with the treatment in the New Accord and the proposed rule, banks must treat operational losses that are related to market risk as operational losses for purposes of calculating risk-based capital requirements under this final rule. For example, losses incurred from a failure of bank personnel to properly execute a stop loss order, from trading fraud, or from a bank selling a security when a purchase was intended, must be treated as operational losses.
Under the proposed rule, banks would treat losses that are related to both operational risk and credit risk as credit losses for purposes of calculating risk-based capital requirements. For example, where a loan defaults (credit risk) and the bank discovers that the collateral for the loan was not properly secured (operational risk), the bank's resulting loss would be attributed to credit risk (not operational risk). This general separation between credit and operational risk is supported by current U.S. accounting standards for the treatment of credit risk.
To be consistent with prevailing practice in the credit card industry, the proposed rule included an exception to this standard for retail credit card fraud losses. Specifically, retail credit card losses arising from non-contractual, third party-initiated fraud (for example, identity theft) would be treated as external fraud operational losses under the proposed rule. All other third party-initiated losses would be treated as credit losses.
Generally, commenters urged the agencies not to be prescriptive on risk boundary issues and to give banks discretion to categorize risk as they deem appropriate, subject to supervisory review. Other commenters noted that boundary issues are so significant that the agencies should not contemplate any additional exceptions to treating losses related to both credit and operational risk as credit losses unless the exceptions are agreed to by the BCBS. Several commenters objected to specific aspects of the agencies' proposal and suggested that additional types of losses related to credit risk and operational risk, including losses related to check fraud, overdraft fraud, and small business loan fraud, should be treated as operational losses for purposes of calculating risk-based capital requirements. One commenter expressly noted its support for the agencies' proposal, which effectively requires banks to treat losses on HELOCs related to both credit risk and operational risk as credit losses for purposes of calculating risk-based capital requirements.
Because of the substantial potential impact boundary issues have on risk-based capital requirements under the advanced approaches, there should be consistency across U.S. banks in how they categorize losses that relate to both credit risk and operational risk. Moreover, the agencies believe that international consistency on this issue is an important objective. Therefore, the final rule maintains the proposed boundaries for losses that relate to both credit risk and operational risk and does not incorporate any additional exemptions beyond that in the proposal.
For banks subject to the market risk rule, the existing market risk rule applies to all positions classified as trading positions in regulatory reports. The New Accord establishes additional criteria for positions to be eligible for application of the market risk rule. The
Under the proposed rule, the wholesale and retail risk-weighted assets calculation consisted of four phases: (1) Categorization of exposures; (2) assignment of wholesale exposures to rating grades and segmentation of retail exposures; (3) assignment of risk parameters to wholesale obligors and exposures and segments of retail exposures; and (4) calculation of risk-weighted asset amounts. The agencies did not receive any negative comments on the four phases for calculating wholesale and retail risk-weighted assets and, thus, are adopting the four-phase concept as proposed. Where applicable, the agencies have clarified particular issues within the four-phase process.
In phase 1, a bank must determine which of its exposures fall into each of the four principal IRB exposure categories—wholesale exposures, retail exposures, securitization exposures, and equity exposures. In addition, a bank must identify within the wholesale exposure category certain exposures that receive a special treatment under the wholesale framework. These exposures include HVCRE exposures, sovereign exposures, eligible purchased wholesale exposures, eligible margin loans, repo-style transactions, OTC derivative contracts, unsettled transactions, and eligible guarantees and eligible credit derivatives that are used as credit risk mitigants.
The treatment of HVCRE exposures and eligible purchased wholesale receivables is discussed below in this section. The treatment of eligible margin loans, repo-style transactions, OTC derivative contracts, and eligible guarantees and eligible credit derivatives that are credit risk mitigants is discussed in section V.C. of the preamble. In addition, sovereign exposures and exposures to or directly and unconditionally guaranteed by the Bank for International Settlements, the International Monetary Fund, the European Commission, the European Central Bank, and multilateral development banks are exempt from the 0.03 percent floor on PD discussed in the next section.
The proposed rule recognized as multilateral development banks only those multilateral lending institutions or regional development banks in which the U.S. government is a shareholder or contributing member. The final rule adopts a slightly expanded definition of multilateral development bank. Specifically, under the final rule, multilateral development bank is defined to include the International Bank for Reconstruction and Development, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank; any multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member; and any multilateral lending institution that a bank's primary Federal supervisor determines poses comparable credit risk.
In phase 1, a bank also must subcategorize its retail exposures as residential mortgage exposures, QREs, or other retail exposures. In addition, a bank must identify any on-balance sheet asset that does not meet the definition of a wholesale, retail, securitization, or equity exposure, as well as any non-material portfolio of exposures to which it chooses, subject to supervisory review, not to apply the IRB risk-based capital formulas.
In phase 2, a bank must assign each wholesale obligor to a single rating grade (for purposes of assigning an estimated PD) and may assign each wholesale exposure to loss severity rating grades (for purposes of assigning an estimated LGD). A bank that elects not to use a loss severity rating grade system for a wholesale exposure must directly assign an estimated LGD to the wholesale exposure in phase 3. As a part of the process of assigning wholesale obligors to rating grades, a bank must identify which of its wholesale obligors are in default. In addition, a bank must group its retail exposures within each retail subcategory into segments that have homogeneous risk characteristics.
Segmentation is the grouping of exposures within each subcategory according to the predominant risk characteristics of the borrower (for example, credit score, debt-to-income ratio, and delinquency) and the exposure (for example, product type and LTV ratio). In general, retail segments should not cross national jurisdictions. A bank has substantial flexibility to use the retail portfolio segmentation it believes is most appropriate for its activities, subject to the following broad principles:
• Differentiation of risk—Segmentation should provide meaningful differentiation of risk. Accordingly, in developing its risk segmentation system, a bank should consider the chosen risk drivers’ ability to separate risk consistently over time and the overall robustness of the bank's approach to segmentation.
• Reliable risk characteristics—Segmentation should use borrower-related risk characteristics and exposure-related risk characteristics that reliably and consistently over time differentiate a segment's risk from that of other segments.
• Consistency—Risk drivers for segmentation should be consistent with the predominant risk characteristics used by the bank for internal credit risk measurement and management.
• Accuracy—The segmentation system should generate segments that separate exposures by realized performance and should be designed so that actual long-run outcomes closely approximate the retail risk parameters estimated by the bank.
A bank might choose to segment exposures by common risk drivers that are relevant and material in determining the loss characteristics of a particular retail product. For example, a bank may segment mortgage loans by LTV band, age from origination, geography, origination channel, and credit score. Statistical modeling, expert judgment, or some combination of the two may determine the most relevant risk drivers. Alternatively, a bank might segment by grouping exposures with similar loss characteristics, such as loss rates or
A bank must segment defaulted retail exposures separately from non-defaulted retail exposures and should base the segmentation of defaulted retail exposures on characteristics that are most predictive of current loss and recovery rates. This segmentation should provide meaningful differentiation so that individual exposures within each defaulted segment do not have material differences in their expected loss severity.
Banks commonly obtain tranched credit protection, for example first-loss or second-loss guarantees, on certain retail exposures such as residential mortgages. The proposal recognized that the securitization framework, which applies to tranched wholesale exposures, is not appropriate for individual retail exposures. Therefore, the agencies proposed to exclude tranched guarantees that apply only to an individual retail exposure from the securitization framework. The preamble to the proposal noted that an important result of this exclusion is that, in contrast to the treatment of wholesale exposures, a bank may recognize recoveries from both a borrower and a guarantor for purposes of estimating LGD for certain retail exposures.
Most commenters who addressed the agencies' proposed treatment for tranched retail guarantees supported the proposed approach. One commenter urged the agencies to extend the treatment of tranched guarantees of retail exposures to wholesale exposures. Another commenter asserted that the proposed treatment was inconsistent with the New Accord.
The agencies have determined that while the securitization framework is the most appropriate risk-based capital treatment for most tranched guarantees, the regulatory burden associated with applying it to tranched guarantees of individual retail exposures exceeds the supervisory benefit. The agencies are therefore adopting the proposed treatment in the final rule and excluding tranched guarantees of individual retail exposures from the securitization framework.
Some banks expressed concern about the treatment of eligible margin loans under the New Accord. Due to the highly collateralized nature and low loss frequency of margin loans, banks typically collect little customer-specific information that they could use to differentiate margin loans into segments. The agencies believe that a bank could appropriately segment its margin loan portfolio using only product-specific risk drivers, such as product type and origination channel. A bank could then use the definition of default to associate a PD and LGD with each segment. As described in section 32 of the rule, a bank may adjust the EAD of eligible margin loans to reflect the risk-mitigating effect of financial collateral. If a bank elects this option to adjust the EAD of eligible margin loans, it must associate an LGD with the segment that does not reflect the presence of collateral.
Under the proposal, if a bank was not able to estimate PD and LGD for an eligible margin loan, the bank could apply a 300 percent risk weight to the EAD of the loan. Commenters generally objected to this approach. As discussed in section III.B.3. of the preamble, several commenters asserted that the agencies should permit banks to treat margin loans and other portfolios that exhibit low loss frequency or for which a bank has limited data on a portfolio basis, by apportioning EL between PD and LGD for portfolios rather than estimating each risk parameter separately. Other commenters suggested that banks should be expected to develop sound practices for applying the IRB approach to such exposures and adopt an appropriate degree of conservatism to address the level of uncertainty in the estimation process. Several commenters added that if a bank simply is unable to estimate PD and LGD for eligible margin loans, they would support the agencies' proposal to apply a flat risk weight to the EAD of eligible margin loans. However, they asserted that the risk weight should not exceed 100 percent given the low levels of loss associated with these types of exposures.
As discussed in section III.B.3. of the preamble, the final rule provides flexibility and incentives for banks to develop and document sound practices for applying the IRB approach to portfolios with limited data or default history, which may include eligible margin loans. However, the agencies believe that for banks facing particular challenges with respect to estimating PD and LGD for eligible margin loans, the proposed application of a 300 percent risk weight to the EAD of an eligible margin loan is a reasonable alternative. The option balances pragmatism with the provision of appropriate incentives for banks to develop processes to apply the IRB approach to such exposures. Accordingly, the final rule continues to provide banks with the option of applying a 300 percent risk weight to the EAD of an eligible margin loan for which it cannot estimate PD and LGD.
A bank may also elect to use a top-down approach, similar to the treatment of retail exposures, for eligible purchased wholesale exposures. Under the final rule, as under the proposal, this approach may be used for exposures purchased directly by the bank. In addition, the final rule clarifies that this approach also may be used for exposures purchased by a securitization SPE in which the bank has invested and for which the bank calculates the capital requirement on the underlying exposures (K
• The purchased wholesale exposure must be purchased from an unaffiliated seller and must not have been directly or indirectly originated by the purchasing bank or securitization SPE;
• The purchased wholesale exposure must be generated on an arm's-length basis between the seller and the obligor (intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other would not satisfy this criterion);
• The purchasing bank must have a claim on all proceeds from the exposure or a pro rata interest in the proceeds;
• The purchased wholesale exposure must have an effective remaining maturity of less than one year; and
• The purchased wholesale exposure must, when consolidated by obligor, not represent a concentrated exposure relative to the portfolio of purchased wholesale exposures.
The agencies proposed a treatment for wholesale lease residuals that differs from the New Accord. A wholesale lease residual typically exposes a bank to the risk of a decline in value of the leased asset and to the credit risk of the lessee. Although the New Accord provides for a flat 100 percent risk weight for wholesale lease residuals, the preamble to the proposal noted that the agencies believed this treatment was excessively punitive for leases to highly creditworthy lessees. Accordingly, the proposed rule required a bank to treat its net investment in a wholesale lease as a single exposure to the lessee. As proposed, there would not be a separate capital calculation for the wholesale lease residual. Commenters on this issue broadly supported the agencies'
Commenters also requested this treatment for retail lease residuals. However, the agencies have determined that the proposal to apply a flat 100 percent risk weight for retail lease residuals, consistent with the New Accord, appropriately balances risk sensitivity and complexity and are maintaining this treatment in the final rule.
In phase 3, a bank associates a PD with each wholesale obligor rating grade; associates an LGD with each wholesale loss severity rating grade or assigns an LGD to each wholesale exposure; assigns an EAD and M to each wholesale exposure; and assigns a PD, LGD, and EAD to each segment of retail exposures. In some cases it may be reasonable to assign the same PD, LGD, or EAD to multiple segments of retail exposures. The quantification phase for PD, LGD, and EAD can generally be divided into four steps—obtaining historical reference data, estimating the risk parameters for the reference data, mapping the historical reference data to the bank's current exposures, and determining the risk parameters for the bank's current exposures. As discussed in more detail below, quantification of M is accomplished through direct computation based on the contractual characteristics of the exposure.
A bank should base its estimation of the values assigned to PD, LGD, and EAD
The reference data set should be described using a set of observed characteristics. Relevant characteristics might include debt ratings, financial measures, geographic regions, the economic environment and industry/sector trends during the time period of the reference data, borrower and loan characteristics related to the risk parameters (such as loan terms, LTV ratio, credit score, income, debt-to-income ratio, or performance history), or other factors that are related in some way to the risk parameters. Banks may use more than one reference data set to improve the robustness or accuracy of the parameter estimates.
A bank should then apply statistical techniques to the reference data to determine a relationship between risk characteristics and the estimated risk parameter. The result of this step is a model that ties descriptive characteristics to the risk parameter estimates. In this context, the term “model” is used in the most general sense; a model may use simple concepts, such as the calculation of averages, or more complex ones, such as an approach based on rigorous regression techniques. This step may include adjustments for differences between this final rule's definition of default and the default definition in the reference data set, or adjustments for data limitations. This step includes adjustments for seasoning effects related to retail exposures, if material.
A bank may use more than one estimation technique to generate estimates of the risk parameters, especially if there are multiple sets of reference data or multiple sample periods. If multiple estimates are generated, the bank should have a clear and consistent policy on reconciling and combining the different estimates.
Once a bank estimates PD, LGD, and EAD for its reference data sets, it should create a link between its portfolio data and the reference data based on corresponding characteristics. Variables or characteristics that are available for the existing portfolio should be mapped or linked to the variables used in the default, loss-severity, or exposure amount model. In order to effectively map the data, reference data characteristics need to allow for the construction of rating and segmentation criteria that are consistent with those used on the bank's portfolio. An important element of mapping is making adjustments for differences between reference data sets and the bank's exposures.
Finally, a bank must apply the risk parameters estimated for the reference data to the bank's actual portfolio data. As noted above, the bank must attribute a PD to each wholesale obligor risk grade, an LGD to each wholesale loss severity grade or wholesale exposure, an EAD and M to each wholesale exposure, and a PD, LGD, and EAD to each segment of retail exposures. If multiple data sets or estimation methods are used, the bank must adopt a means of combining the various estimates at this stage.
The final rule, as noted above, permits a bank to elect to segment its eligible purchased wholesale exposures like retail exposures. A bank that chooses to apply this treatment must directly assign a PD, LGD, EAD, and M to each such segment. If a bank can estimate ECL (but not PD or LGD) for a segment of eligible purchased wholesale exposures, the bank must assume that the LGD of the segment equals 100 percent and that the PD of the segment equals ECL divided by EAD. The bank must estimate ECL for the eligible purchased wholesale exposures without regard to any assumption of recourse or guarantees from the seller or other parties. The bank must then use the wholesale exposure formula in section 31(e) of the final rule to determine the risk-based capital requirement for each segment of eligible purchased wholesale exposures.
A bank may recognize the credit risk mitigation benefits of collateral that secures a wholesale exposure by adjusting its estimate of the LGD of the exposure and may recognize the credit risk mitigation benefits of collateral that secures retail exposures by adjusting its estimate of the PD and LGD of the segment of retail exposures. In certain cases, however, a bank may take financial collateral into account in estimating the EAD of repo-style transactions, eligible margin loans, and OTC derivative contracts (as provided in section 32 of the final rule).
Consistent with the proposed rule, the final rule also provides that a bank may use an EAD of zero for (i) derivative contracts that are publicly traded on an exchange that requires the daily receipt and payment of cash-variation margin; (ii) derivative contracts and repo-style transactions that are outstanding with a qualifying central counterparty (defined below), but not for those transactions that the qualifying central counterparty has rejected; and (iii) credit risk exposures to a qualifying central counterparty that arise from derivative contracts and repo-style transactions in the form of clearing deposits and posted collateral. The final rule, like the proposed rule, defines a qualifying central counterparty as a counterparty (for example, a clearing house) that: (i) Facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts; (ii) requires all participants in its arrangements to be fully collateralized on a daily basis; and (iii) the bank demonstrates to the
Some repo-style transactions and OTC derivative contracts giving rise to counterparty credit risk may result, from an accounting point of view, in both on- and off-balance sheet exposures. A bank that uses an EAD approach to measure the exposure amount of such transactions is not required to apply separately a risk-based capital requirement to an on-balance sheet receivable from the counterparty recorded in connection with that transaction. Because any exposure arising from the on-balance sheet receivable is captured in the risk-based capital requirement determined under the EAD approach, a separate capital requirement would double count the exposure for regulatory capital purposes.
A bank may take into account the risk reducing effects of eligible guarantees and eligible credit derivatives in support of a wholesale exposure by applying the PD substitution approach or the LGD adjustment approach to the exposure as provided in section 33 of the final rule or, if applicable, applying the double default treatment to the exposure as provided in section 34 of the final rule. A bank may decide separately for each wholesale exposure that qualifies for the double default treatment whether to apply the PD substitution approach, the LGD adjustment approach, or the double default treatment. A bank may take into account the risk-reducing effects of guarantees and credit derivatives in support of retail exposures in a segment when quantifying the PD and LGD of the segment.
The proposed rule imposed several supervisory limitations on risk parameters assigned to wholesale obligors and exposures and segments of retail exposures. First, the PD for each wholesale obligor or segment of retail exposures could not be less than 0.03 percent, except for exposures to or directly and unconditionally guaranteed by a sovereign entity, the Bank for International Settlements, the International Monetary Fund, the European Commission, the European Central Bank, or a multilateral development bank, to which the bank assigns a rating grade associated with a PD of less than 0.03 percent.
Second, the LGD of a segment of residential mortgage exposures (other than segments of residential mortgage exposures for which all or substantially all of the principal of the exposures is directly and unconditionally guaranteed by the full faith and credit of a sovereign entity) could not be less than 10 percent. These supervisory floors on PD and LGD applied regardless of whether the bank recognized an eligible guarantee or eligible credit derivative as provided in sections 33 and 34 of the proposed rule.
Commenters did not object to the floor on PD, and the agencies are including it in the final rule. A number of commenters, however, objected to the 10 percent floor on LGD for segments of residential mortgage exposures. These commenters asserted that the floor would penalize low-risk mortgage lending and would provide a disincentive for obtaining high-quality collateral. The agencies continue to believe that the LGD floor is appropriate at least until banks and the agencies gain more experience with the advanced approaches. Accordingly, the agencies are maintaining the floor in the final rule. As the agencies gain more experience with the advanced approaches they will reconsider the need for the floor together with other calibration issues identified during the parallel run and transitional floor periods. The agencies also intend to address this issue and other calibration issues with the BCBS and other supervisory and regulatory authorities, as appropriate.
The 10 percent LGD floor for residential mortgage exposures applies at the segment level. The agencies will not allow a bank to artificially group exposures into segments to avoid the LGD floor for mortgage products. A bank should use consistent risk drivers to determine its retail exposure segmentations and not artificially segment low LGD loans with higher LGD loans to avoid the floor.
A bank also must calculate M for each wholesale exposure. Under the proposed rule, for wholesale exposures other than repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement (defined in section V.C.2. of this preamble), M was defined as the weighted-average remaining maturity (measured in whole or fractional years) of the expected contractual cash flows from the exposure, using the undiscounted amounts of the cash flows as weights. A bank could use its best estimate of future interest rates to compute expected contractual interest payments on a floating-rate exposure, but it could not consider expected but noncontractually required returns of principal, when estimating M. A bank could, at its option, use the nominal remaining maturity (measured in whole or fractional years) of the exposure. The M for repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement was the weighted-average remaining maturity (measured in whole or fractional years) of the individual transactions subject to the qualifying master netting agreement, with the weight of each individual transaction set equal to the notional amount of the transaction. The M for netting sets for which the bank used the internal models methodology was calculated as described in section 32(c) of the proposed rule.
Many commenters requested more flexibility in the definition of M, including the ability to estimate noncontractually required prepayments and the ability to use either discounted or undiscounted cash flows. However, the agencies believe that the proposed definition of M, which is consistent with the New Accord, is appropriately conservative and provides for a consistent definition of M across internationally active banks. The final rule therefore maintains the proposed definition of M.
Under the final rule, as under the proposal, for most exposures M may be no greater than five years and no less than one year. For exposures that have an original maturity of less than one year and are not part of a bank's ongoing financing of the obligor, however, a bank may set M as low as one day, consistent with the New Accord. An exposure is not part of a bank's ongoing financing of the obligor if the bank (i) has a legal and practical ability not to renew or roll over the exposure in the event of credit deterioration of the obligor; (ii) makes an independent credit decision at the inception of the exposure and at every renewal or rollover; and (iii) has no substantial commercial incentive to continue its credit relationship with the obligor in the event of credit deterioration of the obligor. Examples of transactions that may qualify for the exemption from the one-year maturity floor include amounts due from other banks, including deposits in other banks; bankers” acceptances; sovereign exposures; short-term self-liquidating trade finance exposures; repo-style transactions; eligible margin loans; unsettled trades and other exposures resulting from payment and settlement processes; and collateralized OTC derivative contracts subject to daily remargining.
After a bank assigns risk parameters to each of its wholesale obligors and exposures and retail segments, the bank must calculate the dollar risk-based capital requirement for each wholesale exposure to a non-defaulted obligor and each segment of non-defaulted retail exposures (except eligible guarantees and eligible credit derivatives that hedge another wholesale exposure). Other than for exposures to which the bank applies the double default treatment in section 34 of the final rule, a bank makes this calculation by inserting the risk parameters for the wholesale obligor and exposure or retail segment into the appropriate IRB risk-based capital formula specified in Table B, and multiplying the output of the formula (K) by the EAD of the exposure or segment.
The sum of the dollar risk-based capital requirements for wholesale exposures to non-defaulted obligors (including exposures subject to the double default treatment described below) and segments of non-defaulted retail exposures equals the total dollar risk-based capital requirement for those exposures and segments. The total dollar risk-based capital requirement multiplied by 12.5 equals the risk-weighted asset amount.
Under the proposed rule, to compute the risk-weighted asset amount for a wholesale exposure to a defaulted obligor, a bank would first have to compare two amounts: (i) The sum of 0.08 multiplied by the EAD of the wholesale exposure plus the amount of any charge-offs or write-downs on the exposure; and (ii) K for the wholesale exposure (as determined in Table B immediately before the obligor became defaulted), multiplied by the EAD of the exposure immediately before the exposure became defaulted. If the amount calculated in (i) were equal to or greater than the amount calculated in (ii), the dollar risk-based capital requirement for the exposure would be 0.08 multiplied by the EAD of the exposure. If the amount calculated in (i) were less than the amount calculated in (ii), the dollar risk-based capital requirement for the exposure would be K for the exposure (as determined in Table B immediately before the obligor became defaulted), multiplied by the
The proposed rule provided a simpler approach for segments of defaulted retail exposures. The dollar risk-based capital requirement for a segment of defaulted retail exposures was 0.08 multiplied by the EAD of the segment.
Some commenters objected to the proposed risk-based capital treatment of defaulted wholesale exposures, which differs from the approach in the New Accord. These commenters contended that it would be burdensome to track the pre-default risk-based capital requirements for purposes of the proposed comparison. These commenters also claimed that the cost and burden of the proposed treatment of defaulted wholesale exposures would subject banks to a competitive disadvantage relative to international counterparts subject to an approach similar to that in the New Accord.
In view of commenters’ concerns about cost and regulatory burden, the final rule treats defaulted wholesale exposures the same as defaulted retail exposures. The dollar risk-based capital requirement of a wholesale exposure to a defaulted obligor equals 0.08 multiplied by the EAD of the exposure. The agencies will review banks’ practices to ensure that banks are not moving exposures from non-defaulted to defaulted status for the primary purpose of obtaining a reduction in risk-based capital requirements.
To convert the dollar risk-based capital requirements for defaulted exposures into a risk-weighted asset amount, the bank must sum the dollar risk-based capital requirements for all wholesale exposures to defaulted obligors and segments of defaulted retail exposures and multiply the sum by 12.5.
A bank may assign a risk-weighted asset amount of zero to cash owned and held in all offices of the bank or in transit, and for gold bullion held in the bank's own vaults or held in another bank's vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities. The risk-weighted asset amount for an on-balance sheet asset that does not meet the definition of a wholesale, retail, securitization, or equity exposure—for example, property, plant, and equipment and mortgage servicing rights—is its carrying value. The risk-weighted asset amount for a portfolio of exposures that the bank has demonstrated to its primary Federal supervisor's satisfaction is, when combined with all other portfolios of exposures that the bank seeks to treat as immaterial for risk-based capital purposes, not material to the bank generally is its carrying value (for on-balance sheet exposures) or notional amount (for off-balance sheet exposures). For this purpose, the notional amount of an OTC derivative contract that is not a credit derivative is the EAD of the derivative as calculated in section 32 of the final rule. If an OTC derivative contract is a credit derivative, the notional amount is the notional amount of the credit derivative.
Total wholesale and retail risk-weighted assets are defined as the sum of risk-weighted assets for wholesale exposures to non-defaulted obligors and segments of non-defaulted retail exposures, wholesale exposures to defaulted obligors and segments of defaulted retail exposures, assets not included in an exposure category, non-material portfolios of exposures (as calculated under section 31 of the final rule), and unsettled transactions (as calculated under section 35 of the final rule and described in section V.D. of the preamble) minus the amounts deducted from capital pursuant to the general risk-based capital rules (excluding those deductions reversed in section 12 of the final rule).
The general risk-based capital rules assign 50 percent and 100 percent risk weights to certain one-to four-family residential pre-sold construction loans and multifamily residential loans.
When Congress enacted the RTCRRI Act in 1991, the agencies’ risk-based capital rules reflected the Basel I framework. Consequently, the risk weight treatment for certain categories of mortgage loans in the RTCRRI Act assumes a risk weight bucketing approach, instead of the more risk-sensitive IRB approach in the advanced approaches.
In the proposed rule, the agencies identified three types of residential mortgage loans addressed by the RTCRRI Act that would continue to receive the risk weights provided in the Act. Consistent with the general risk-based capital rules, the proposed rule would apply the following risk weights (instead of the risk weights that would otherwise be produced under the IRB risk-based capital formulas): (i) A 50 percent risk weight for one-to four-family residential construction loans if the residences have been pre-sold under firm contracts to purchasers who have obtained firm commitments for permanent qualifying mortgages and have made substantial earnest money deposits, and the loans meet the other underwriting characteristics established by the agencies in the general risk-based capital rules;
Commenters generally opposed the proposed assignment of a 50 percent risk weight to multifamily and pre-sold single family residential construction exposures. Commenters maintained that the RTCRRI Act capital requirements do not align with risk, are contrary to the
The agencies agree with these concerns and have decided to adopt in the final rule an alternative described in the preamble to the proposed rule. The proposed rule's preamble noted the tension between the statutory risk weights provided by the RTCRRI Act and the more risk-sensitive IRB approaches to risk-based capital requirements. The preamble observed that the RTCRRI Act permits the agencies to prescribe additional underwriting characteristics for identifying loans that are subject to the 50 percent statutory risk weights, provided these underwriting characteristics are “consistent with the purposes of the minimum acceptable capital requirements to maintain the safety and soundness of financial institutions.” The agencies asked whether they should impose the following additional underwriting criteria as additional requirements for a core or opt-in bank to qualify for the statutory 50 percent risk weight for a particular mortgage loan: (i) That the bank has an IRB risk measurement and management system in place that assesses the PD and LGD of prospective residential mortgage exposures; and (ii) that the bank's IRB system generates a 50 percent risk weight for the loan under the IRB risk-based capital formula. If the bank's IRB system does not generate a 50 percent risk weight for a particular loan, the loan would not qualify for the statutory risk weight and would receive the risk weight generated by the IRB system.
A few commenters opposed this alternative approach and indicated that the additional underwriting criteria would increase operational burden. Other commenters, however, observed that compliance with the additional underwriting criteria would not be burdensome.
After careful consideration of the comments and further analysis of the text, spirit and legislative history of the RTCRRI Act, the agencies have concluded that they should impose the additional underwriting criteria described in the preamble to the proposed rule as minimum requirements for a core or opt-in bank to use the statutory 50 percent risk weight for particular loans. The agencies believe that the imposition of these criteria is consistent with the plain language of the RTCRRI Act, which allows a bank to use the 50 percent risk weight only if it meets the additional underwriting characteristics established by the agencies. The agencies have concluded that the additional underwriting characteristics imposed in the final rule are “consistent with the purposes of the minimum acceptable capital requirements to maintain the safety and soundness of financial institution,” because the criteria will make the risk-based capital requirement for these loans a function of each bank's historical loss experience for the loans and will therefore more accurately reflect the performance and risk of loss for these loans. The additional underwriting characteristics are also consistent with the purposes and legislative history of RTCRRI Act, which was designed to reflect the true level of risk associated with these types of mortgage loans and to do so in accordance with the Basel Accord.
A capital-related provision of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), enacted by Congress just four days after its adoption of the RTCRRI Act, also supports the addition of the new underwriting characteristics. Section 305(b)(1)(B) of FDICIA
As noted above, section 618(a)(2) of the RTCRRI Act mandates that each agency amend its capital regulations to provide a 100 percent risk weight to any single-family residential construction loan for which the purchase contract is cancelled. Because the statute does not authorize the agencies to establish additional underwriting characteristics for this small category of loans, the final rule, like the proposed rule, provides a 100 percent risk weight for single-family residential construction loans for which the purchase contract is cancelled.
Banks use a number of techniques to mitigate credit risk. This section of the preamble describes how the final rule recognizes the risk-mitigating effects of both financial collateral (defined below) and nonfinancial collateral, as well as guarantees and credit derivatives, for risk-based capital purposes. To recognize credit risk mitigants for risk-based capital purposes, a bank should have in place operational procedures and risk management processes that ensure that all documentation used in collateralizing or guaranteeing a transaction is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. The bank should have conducted sufficient legal review to reach a well-founded conclusion that the documentation meets this standard and should reconduct such a review as necessary to ensure continuing enforceability.
Although the use of CRM techniques may reduce or transfer credit risk, it simultaneously may increase other risks, including operational, liquidity, and market risks. Accordingly, it is imperative that banks employ robust procedures and processes to control risks, including roll-off risk and concentration of risks, arising from the bank's use of CRM techniques and to monitor the implications of using CRM techniques for the bank's overall credit risk profile.
Under the final rule, a bank generally recognizes collateral that secures a wholesale exposure as part of the LGD estimation process and generally recognizes collateral that secures a retail exposure as part of the PD and LGD estimation process, as described above in section V.B.3. of the preamble. However, in certain limited circumstances described in the next section, a bank may adjust EAD to reflect the risk mitigating effect of financial collateral.
Although the final rule does not contain specific regulatory requirements about how a bank incorporates collateral into PD or LGD estimates, a bank should, when reflecting the credit risk mitigation benefits of collateral in its estimation of the risk parameters of a wholesale or retail exposure:
(i) Conduct sufficient legal review to ensure, at inception and on an ongoing basis, that all documentation used in the collateralized transaction is binding on
(ii) Consider the correlation between obligor risk and collateral risk in the transaction;
(iii) Consider any currency and/or maturity mismatch between the hedged exposure and the collateral;
(iv) Ground its risk parameter estimates for the transaction in historical data, using historical recovery rates where available; and
(v) Fully take into account the time and cost needed to realize the liquidation proceeds and the potential for a decline in collateral value over this time period.
The bank also should ensure that:
(i) The legal mechanism under which the collateral is pledged or transferred ensures that the bank has the right to liquidate or take legal possession of the collateral in a timely manner in the event of the default, insolvency, or bankruptcy (or other defined credit event) of the obligor and, where applicable, the custodian holding the collateral;
(ii) The bank has taken all steps necessary to fulfill legal requirements to secure its interest in the collateral so that it has and maintains an enforceable security interest;
(iii) The bank has clear and robust procedures to ensure observation of any legal conditions required for declaring the default of the borrower and prompt liquidation of the collateral in the event of default;
(iv) The bank has established procedures and practices for (A) conservatively estimating, on a regular ongoing basis, the market value of the collateral, taking into account factors that could affect that value (for example, the liquidity of the market for the collateral and obsolescence or deterioration of the collateral), and (B) where applicable, periodically verifying the collateral (for example, through physical inspection of collateral such as inventory and equipment); and
(v) The bank has in place systems for promptly requesting and receiving additional collateral for transactions whose terms require maintenance of collateral values at specified thresholds.
This section describes two EAD-based methodologies—a collateral haircut approach and an internal models methodology—that a bank may use instead of an LGD estimation methodology to recognize the benefits of financial collateral in mitigating the counterparty credit risk associated with repo-style transactions, eligible margin loans, collateralized OTC derivative contracts, and single product groups of such transactions with a single counterparty subject to a qualifying master netting agreement (netting sets).
One difference from the proposal is that, consistent with the New Accord, under the final rule these three methodologies may also be used to recognize the benefits of any collateral (not only financial collateral) mitigating the counterparty credit risk of repo-style transactions that are included in a bank's VaR-based measure under the market risk rule. In response to comments requesting broader application of the EAD-based methodologies for recognizing the risk-mitigating effect of collateral, the agencies added this flexibility to the final rule to enhance international consistency and reduce regulatory burden.
A bank may use any combination of the three methodologies for collateral recognition; however, it must use the same methodology for similar exposures. This means that, as a general matter, the agencies expect a bank to use one of the three methodologies for all its repo-style transactions, one of the three methodologies for all its eligible margin loans, and one of the three methodologies for all its OTC derivative contracts. A bank may, however, apply a different methodology to subsets of repo-style transactions, eligible margin loans, or OTC derivatives by product type or geographical location if its application of different methodologies is designed to separate transactions that do not have similar risk profiles and is not designed to arbitrage the rule. For example, a bank may choose to use one methodology for agency securities lending transactions—that is, repo-style transactions in which the bank, acting as agent for a customer, lends the customer's securities and indemnifies the customer against loss—and another methodology for all other repo-style transactions.
This section also describes the methodology for calculating EAD for an OTC derivative contract or set of OTC derivative contracts subject to a qualifying master netting agreement. Table C illustrates which EAD estimation methodologies may be applied to particular types of exposure.
Under the final rule, consistent with the proposal, a qualifying master netting agreement is defined to mean any written, legally enforceable bilateral agreement, provided that:
(i) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including bankruptcy, insolvency, or similar proceeding, of the counterparty;
(ii) The agreement provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of bankruptcy, insolvency, or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;
(iii) The bank has conducted sufficient legal review to conclude with a well-founded basis (and has maintained sufficient written documentation of that legal review) that the agreement meets the requirements of paragraph (ii) of this definition and that in the event of a legal challenge (including one resulting from default or from bankruptcy, insolvency, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions;
(iv) The bank establishes and maintains procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of this definition; and
(v) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make lower payments than it would make otherwise under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement).
The agencies consider the following jurisdictions to be relevant for a qualifying master netting agreement: the jurisdiction in which each counterparty is chartered or the equivalent location in the case of non-corporate entities, and if a branch of a counterparty is involved, then also the jurisdiction in which the branch is located; the jurisdiction that governs the individual transactions covered by the agreement; and the jurisdiction that governs the agreement.
Under the final rule, a bank may recognize the risk-mitigating effect of financial collateral that secures a repo-style transaction, eligible margin loan, or single-product netting set of such transactions and the risk-mitigating effect of any collateral that secures a repo-style transaction that is included in a bank's VaR-based measure under the market risk rule through an adjustment to EAD rather than LGD. The bank may use a collateral haircut approach or one of two models approaches: a simple VaR methodology (for single-product netting sets of repo-style transactions or eligible margin loans) or an internal models methodology. Figure 2 illustrates the methodologies available for calculating EAD and LGD for eligible margin loans and repo-style transactions.
The proposed rule defined a repo-style transaction as a repurchase or reverse repurchase transaction, or a securities borrowing or securities lending transaction (including a transaction in which the bank acts as agent for a customer and indemnifies the customer against loss), provided that:
(i) The transaction is based solely on liquid and readily marketable securities or cash;
(ii) The transaction is marked to market daily and subject to daily margin maintenance requirements;
(iii) The transaction is executed under an agreement that provides the bank the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set off collateral promptly upon an event of default (including upon an event of bankruptcy, insolvency, or similar proceeding) of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;
(iv) The bank has conducted and documented sufficient legal review to conclude with a well-founded basis that the agreement meets the requirements of paragraph (iii) of this definition and is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
In the proposal, the agencies recognized that criterion (iii) above may pose challenges for certain transactions that would not be eligible for certain exemptions from bankruptcy or receivership laws because the counterparty—for example, a sovereign entity or a pension fund—is not subject to such laws. The agencies sought comment on ways this criterion could be crafted to accommodate such transactions when justified on prudential grounds, while ensuring that the requirements in criterion (iii) are met for transactions that are eligible for those exemptions.
Several commenters responded to this question by urging the agencies to modify the third component of the repo-style transaction definition in accordance with the 2006 interagency securities borrowing rule.
The agencies have decided to modify the definition of repo-style transaction consistent with this suggestion by commenters and consistent with the 2006 securities borrowing rule. The agencies believe that this modification will resolve, in a manner that preserves safety and soundness, technical difficulties that banks would have had in meeting the proposed rule's
The proposed rule defined an eligible margin loan as an extension of credit where:
(i) The credit extension is collateralized exclusively by debt or equity securities that are liquid and readily marketable;
(ii) The collateral is marked to market daily and the transaction is subject to daily margin maintenance requirements;
(iii) The extension of credit is conducted under an agreement that provides the bank the right to accelerate and terminate the extension of credit and to liquidate or set off collateral promptly upon an event of default (including upon an event of bankruptcy, insolvency, or similar proceeding) of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;
(iv) The bank has conducted and documented sufficient legal review to conclude with a well-founded basis that the agreement meets the requirements of paragraph (iii) of this definition and is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
Commenters generally supported this definition, but some objected to the prescriptiveness of criterion (iii). Criterion (iii) is necessary to ensure that a bank is quickly able to realize the value of its collateral in the event of obligor default. Collateral stayed by bankruptcy and not liquidated until a date far in the future is more appropriately reflected as a discounted positive cash flow in LGD estimation. Criterion (iii) is satisfied when the bank has conducted sufficient legal review to conclude with a well-founded basis (and has maintained sufficient written documentation of that legal review) that a margin loan would be exempt from the bankruptcy auto-stay. The agencies are therefore maintaining substantially the same definition of eligible margin loan in the final rule.
With the exception of repo-style transactions that are included in a bank's VaR-based measure under the market risk rule (as discussed above), for purposes of determining EAD for repo-style transactions, eligible margin loans, and OTC derivatives, and recognizing collateral mitigating the counterparty credit risk of such exposures, the final rule (consistent with the proposed rule) allows banks to take into account only financial collateral. The proposed rule defined financial collateral as collateral in the form of any of the following instruments in which the bank has a perfected, first priority security interest or the legal equivalent thereof: (i) Cash on deposit with the bank (including cash held for the bank by a third-party custodian or trustee); (ii) gold bullion; (iii) long-term debt securities that have an applicable external rating of one category below investment grade or higher (for example, at least BB-); (iv) short-term debt instruments that have an applicable external rating of at least investment grade (for example, at least A-3); (v) equity securities that are publicly traded; (vi) convertible bonds that are publicly traded; and (vii) mutual fund shares and money market mutual fund shares if a price for the shares is publicly quoted daily.
In connection with this definition, the agencies asked for comment on the appropriateness of requiring that a bank have a perfected, first priority security interest, or the legal equivalent thereof, in the definition of financial collateral. A couple of commenters supported this requirement, but several other commenters objected. The objecting commenters acknowledged that the requirement would generally be consistent with current U.S. collateral practices for repo-style transactions, eligible margin loans, and OTC derivatives, but they criticized the requirement on the grounds that: (i) Obtaining a perfected, first priority security interest may not be the current market practice outside the United States; (ii) U.S. practices may evolve in such a fashion as to not meet this requirement; and (iii) the requirement is not explicit in the New Accord. Other commenters asked the agencies to clarify that the requirement would be met for all or certain forms of collateral if the bank had possession and control of the collateral and a reasonable basis to believe it could promptly liquidate the collateral.
The agencies believe that in order to use the EAD adjustment approaches for exposures within the United States, a bank must have a perfected, first priority security interest in collateral, with the exception of cash on deposit with the bank and certain custodial arrangements. The agencies have modified the proposed requirement to address a concern raised by several commenters that a bank could fail to satisfy the first priority security interest requirement because of the senior security interest of a third-party custodian involved as an intermediary in the transaction. Under the final rule, a bank meets the security interest requirement so long as the bank has a perfected, first priority security interest in the collateral notwithstanding the prior security interest of any custodial agent. Outside of the United States, the definition of financial collateral can be satisfied as long as the bank has the legal equivalent of a perfected, first priority security interest. For example, cash on deposit with the bank is an example of the legal equivalent of a perfected, first priority security interest. The agencies intend to apply this “legal equivalent” standard flexibly to deal with non-U.S. collateral access regimes.
The agencies also invited comment on the extent to which assets that do not meet the definition of financial collateral are the basis of repo-style transactions engaged in by banks or are taken by banks as collateral for eligible margin loans or OTC derivatives. The agencies also inquired as to whether the definition of financial collateral should be expanded to reflect any other asset types.
A substantial number of commenters asked the agencies to add asset types to the list of financial collateral. The principal recommended additions included: (i) Non-investment-grade externally rated bonds; (ii) bonds that are not externally rated; (iii) all financial instruments; (iv) letters of credit; (v) mortgages loans; and (vi) certificates of deposit. Some commenters that advocated inclusion of a wider range of bonds admitted that it may be reasonable to impose some sort of liquidity requirement on the additional bonds and to impose a 25-50 percent standard supervisory haircut for such additional bonds. Some of the commenters that advocated inclusion of
As described above, to enhance international consistency and conform the final rule more closely to the New Accord, the agencies have decided to permit a bank to use the EAD approach for all repo-style transactions that are included in a bank's VaR-based measure under the market risk rule, regardless of the underlying collateral type. The agencies are satisfied that such repo-style transactions would be based on collateral that is sufficiently liquid to justify applying the EAD approach.
The agencies have included conforming residential mortgages in the definition of financial collateral and as acceptable underlying instruments in the definitions of repo-style transaction and eligible margin loan based on the liquidity of such mortgages and their widespread use as collateral in repo-style transactions. However, because this inclusion goes beyond the New Accord's recognition of financial collateral, the agencies decided to take a conservative approach and require banks to use the standard supervisory haircut approach, with a 25 percent haircut and minimum ten-business-day holding period, in order to recognize conforming residential mortgage collateral in EAD (other than for repo-style transactions that are included in a bank's VaR-based measure under the market risk rule). Use of the standard supervisory haircut approach for repo-style transactions, eligible margin loans, and OTC derivatives collateralized by conforming mortgages does not preclude a bank's use of the other EAD adjustment approaches for exposures collateralized by other types of financial collateral. Due to concerns about both competitive equity and the liquidity and price availability of other types of collateral, the agencies are not otherwise expanding the proposed definition of financial collateral in the final rule.
Under the collateral haircut approach of the final rule, similar to the proposed rule, a bank must set EAD equal to the sum of three quantities: (i) The value of the exposure less the value of the collateral; (ii) the absolute value of the net position in a given instrument or in gold (where the net position in a given instrument or in gold equals the sum of the current market values of the instrument or gold the bank has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current market values of that same instrument or gold the bank has borrowed, purchased subject to resale, or taken as collateral from the counterparty) multiplied by the market price volatility haircut appropriate to the instrument or gold; and (iii) the sum of the absolute values of the net position of any cash or instruments in each currency that is different from the settlement currency multiplied by the haircut appropriate to each currency mismatch. To determine the appropriate haircuts, a bank may choose to use standard supervisory haircuts or, with prior written approval from its primary Federal supervisor, its own estimates of haircuts.
In the preamble to the proposed rule, for purposes of the collateral haircut approach, the agencies clarified that a given security would include, for example, all securities with a single Committee on Uniform Securities Identification Procedures (CUSIP) number and would not include securities with different CUSIP numbers, even if issued by the same issuer with the same maturity date. The agencies sought comment on alternative approaches for determining a given security for purposes of the collateral haircut approach. A few commenters expressed support for the proposed CUSIP approach to defining a given security, but one commenter asked the agencies to permit each bank the flexibility to define given security. The collateral haircut approach in the final rule is based on a bank's net position in a “given instrument or gold” rather than in a “given security” to more precisely capture the positions to which a bank must apply the haircuts. To enhance safety and soundness and comparability across banks, the agencies believe that it is important to preserve the relatively clear CUSIP approach to defining a given instrument for purposes of the collateral haircut approach. Accordingly, the agencies are maintaining the CUSIP approach as appropriate for determining a given instrument for instruments that are securities.
As
Under the final rule, as under the proposal, a bank that uses internally estimated haircuts must adhere to the following rules. The bank may calculate internally estimated haircuts for categories of debt securities that have an applicable external rating of at least investment grade. The haircut for a category of securities must be representative of the internal volatility estimates for securities in that category that the bank has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining
One commenter recommended that the agencies permit banks to use category-based internal estimate haircuts for non-investment-grade bonds and equity securities. The agencies have decided to adopt the proposed rule's provisions on category-based haircuts because they are consistent with the New Accord and because the volatilities of non-investment-grade bonds and of equity securities are more dependent on idiosyncratic, issuer-specific events than the volatility of investment-grade bonds.
Under the final rule, as under the proposal, when a bank calculates an internally estimated haircut on a T
As noted above, under the final rule, as under the proposal, a bank may use one of two internal models approaches to recognize the risk mitigating effects of financial collateral that secures a repo-style transaction or eligible margin loan. This section of the preamble describes the simple VaR methodology; a later section of the preamble describes the internal models methodology (which also may be used to determine the EAD for OTC derivative contracts). The agencies received no material comments on the simple VaR methodology and are adopting the methodology without change from the proposal.
With the prior written approval of its primary Federal supervisor, a bank may estimate EAD for repo-style transactions and eligible margin loans subject to a single product qualifying master netting agreement using a VaR model. Under the simple VaR methodology, a bank's EAD for the transactions subject to such a netting agreement is equal to the value of the exposures minus the value of the collateral plus a VaR-based estimate of potential future exposure (PFE). The value of the exposures is the sum of the current market values of all securities and cash the bank has lent, sold subject to repurchase, or posted as collateral to a counterparty under the netting set. The value of the collateral is the sum of the current market values of all securities and cash the bank has borrowed, purchased subject to resale, or taken as collateral from a counterparty under the netting set. The VaR-based estimate of PFE is an estimate of the bank's maximum exposure on the netting set over a fixed time horizon with a high level of confidence.
Specifically, the VaR model must estimate the bank's 99th percentile, one-tailed confidence interval for an increase in the value of the exposures minus the value of the collateral (ΣE−ΣC) over a five-business-day holding period for repo-style transactions or over a ten-business-day holding period for eligible margin loans using a minimum one-year historical observation period of price data representing the instruments that the bank has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral.
The qualification requirements for the use of a VaR model are less stringent than the qualification requirements for the internal models methodology described below. The main ongoing qualification requirement for using a VaR model is that the bank must validate its VaR model by establishing and maintaining a rigorous and regular backtesting regime.
Under the final rule, as under the proposed rule, a bank may use either the current exposure methodology or the internal models methodology to determine the EAD for OTC derivative contracts. An OTC derivative contract is defined as a derivative contract that is not traded on an exchange that requires the daily receipt and payment of cash-variation margin. A derivative contract is defined to include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivatives, and any other instrument that poses similar counterparty credit risks. The rule also defines derivative contracts to include unsettled securities, commodities, and foreign exchange trades with a contractual settlement or delivery lag that is longer than the normal settlement period (which the rule defines as the lesser of the market standard for the particular instrument or five business days). This includes, for example, agency mortgage-backed securities transactions conducted in the To-Be-Announced market.
Figure 3 illustrates the treatment of OTC derivative contracts.
The final rule's current exposure methodology for determining EAD for single OTC derivative contracts is similar to the methodology in the general risk-based capital rules and is the same as the current exposure methodology in the proposal. Under the current exposure methodology, the EAD for an OTC derivative contract is equal to the sum of the bank's current credit exposure and PFE on the derivative contract. The current credit exposure for a single OTC derivative contract is the greater of the mark-to-market value of the derivative contract or zero.
The final rule's current exposure methodology for OTC derivative contracts subject to qualifying master netting agreements is also similar to the treatment in the agencies' general risk-based capital rules and, with one exception discussed below, is the same as the treatment in the proposal. Under the general risk-based capital rules and under the proposed rule, a bank could not recognize netting agreements for OTC derivative contracts for risk-based capital purposes unless it obtained a written and reasoned legal opinion representing that, in the event of a legal challenge, the bank's exposure would be found to be the net amount in the relevant jurisdictions.
Although one commenter supported the proposed rule's written legal opinion requirement, many other commenters asked the agencies to remove this requirement. These commenters maintained that, provided a transaction is conducted in a jurisdiction and with a counterparty type that is covered by a commissioned legal opinion, use of industry-developed standardized contracts for certain OTC derivative products and reliance on commissioned legal opinions as to the enforceability of these contracts should be a sufficient guarantor of enforceability. These commenters added that reliance on such commissioned legal opinions is standard market practice.
The agencies continue to believe that the legal enforceability of netting agreements is a necessary condition for a bank to recognize netting effects in its capital calculation. However, the agencies have conducted additional analysis and agree that a unique, written legal opinion is not necessary in all cases to ensure the enforceability of an OTC derivative netting agreement. Accordingly, the agencies have removed the requirement that a bank obtain a written and well reasoned legal opinion for each of its qualifying master netting agreements that cover OTC derivatives. As a result, under the final rule, to obtain netting treatment for multiple OTC derivative contracts subject to a qualifying master netting agreement, a
The proposed rule's conversion factor (CF) matrix used to compute PFE was based on the matrices in the general risk-based capital rules, with two exceptions. First, under the proposed rule, the CF for credit derivatives that are not used to hedge the credit risk of exposures subject to an IRB credit risk capital requirement was specified to be 5.0 percent for contracts with investment-grade reference obligors and 10.0 percent for contracts with non-investment-grade reference obligors.
Under the final rule, as under the proposed rule, if an OTC derivative contract is collateralized by financial collateral and a bank uses the current exposure methodology to determine EAD for the exposure, the bank must first determine an unsecured EAD as described above and in section 32(c) of the rule. To take into account the risk-reducing effects of the financial collateral, the bank may either adjust the LGD of the contract or, if the transaction is subject to daily marking-to-market and remargining, adjust the EAD of the contract using the collateral haircut approach for repo-style transactions and eligible margin loans described above and in section 32(b) of the rule.
Under part VI of the final rule, and of the proposed rule, a bank must treat an equity derivative contract as an equity exposure and compute a risk-weighted asset amount for that exposure. If the bank is using the internal models approach for its equity exposures, it also must compute a risk-weighted asset amount for its counterparty credit risk exposure on the equity derivative contract. However, if the bank is using the simple risk weight approach for its equity exposures, it may choose not to hold risk-based capital against the counterparty credit risk of the equity derivative contract. Likewise, a bank that purchases a credit derivative that is recognized under section 33 or 34 of the rule as a credit risk mitigant for an exposure that is not a covered position under the market risk rule does not have to compute a separate counterparty credit risk capital requirement for the credit derivative.
In addition, where a bank provides protection through a credit derivative that is not treated as a covered position under the market risk rule, it must treat the credit derivative as a wholesale exposure to the reference obligor and compute a risk-weighted asset amount for the credit derivative under section 31 of the rule. The bank need not compute a counterparty credit risk capital requirement for the credit derivative, so long as it does so consistently for all such credit derivatives and either includes all or excludes all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes. Where the bank provides protection through a credit derivative treated as a covered position under the market risk rule, it must compute a counterparty credit risk capital requirement for the credit derivative under section 31 of the rule.
The final rule, like the proposed rule, includes an internal models methodology for the calculation of EAD for the counterparty credit exposure of OTC derivatives, eligible margin loans, and repo-style transactions. The internal models methodology requires a risk model that estimates EAD at the level of a netting set. A transaction not subject to a qualifying master netting agreement is considered to be its own netting set and a bank must calculate EAD for each such transaction individually.
A bank may use the internal models methodology for OTC derivatives (collateralized or uncollateralized) and single-product netting sets thereof, for eligible margin loans and single-product netting sets thereof, or for repo-style transactions and single-product netting sets thereof. A bank that uses the internal models methodology for a particular transaction type (that is, OTC derivative contracts, eligible margin loans, or repo-style transactions) must use the internal models methodology for all transactions of that transaction type. However, a bank may choose whether or not to use the internal models methodology for each transaction type.
A bank also may use the internal models methodology for OTC derivatives, eligible margin loans, and repo-style transactions subject to a qualifying cross-product master netting agreement if (i) the bank effectively integrates the risk mitigating effects of cross-product netting into its risk management and other information technology systems; and (ii) the bank obtains the prior written approval of its primary Federal supervisor.
The final rule tracks the proposed rule by defining a qualifying cross-product master netting agreement as a qualifying master netting agreement that provides for termination and close-out netting across multiple types of financial transactions or qualifying master netting agreements in the event of a counterparty's default, provided that:
(i) The underlying financial transactions are OTC derivative contracts, eligible margin loans, or repo-style transactions; and
(ii) The bank obtains a written legal opinion verifying the validity and enforceability of the netting agreement under applicable law of the relevant jurisdictions if the counterparty fails to perform upon an event of default, including upon an event of bankruptcy, insolvency, or similar proceeding.
As discussed in the proposal, banks use several measures to manage their exposure to the counterparty credit risk of repo-style transactions, eligible margin loans, and OTC derivatives, including PFE, expected exposure (EE), and expected positive exposure (EPE). PFE is the maximum exposure estimated to occur over a future horizon at a high level of statistical confidence. Banks often use PFE when measuring counterparty credit risk exposure against counterparty credit limits. EE is the expected value of the probability distribution of non-negative credit risk exposures to a counterparty at any specified future date, whereas EPE is the time-weighted average of individual expected exposures estimated for a given forecasting horizon (one year in the proposed rule). The final rule clarifies that, when estimating EE, a bank must set any negative market values in the probability distribution of market values to a counterparty at a specified future date to zero to convert the probability distribution of market values to the probability distribution of credit risk exposures. Banks typically compute EPE, EE, and PFE using a common stochastic model.
A paper published by the BCBS in July 2005 titled “The Application of Basel II to Trading Activities and the Treatment of Double Default Effects” notes that EPE is an appropriate EAD measure for determining risk-based capital requirements for counterparty credit risk because transactions with counterparty credit risk “are given the same standing as loans with the goal of reducing the capital treatment's influence on a firm's decision to extend an on-balance sheet loan rather than engage in an economically equivalent transaction that involves exposure to counterparty credit risk.”
To address the concern that EE and EPE may not capture risk arising from the replacement of existing short-term positions over the one-year horizon used for capital requirements (rollover risk) or may underestimate the exposures of eligible margin loans, repo-style transactions, and OTC derivatives with short maturities, the final rule, like the proposed rule, uses a netting set's effective EPE as the basis for calculating EAD for counterparty credit risk. Consistent with the use of a one-year PD horizon, effective EPE is the time-weighted average of effective EE over one year where the weights are the proportion that an individual effective EE represents in a one-year time interval. If all contracts in a netting set mature before one year, effective EPE is the average of effective EE until all contracts in the netting set mature. For example, if the longest maturity contract in the netting set matures in six months, effective EPE would be the average of effective EE over six months.
Effective EE is defined as:
The final rule clarifies that if a bank hedges some or all of the counterparty credit risk associated with a netting set using an eligible credit derivative, the bank may take the reduction in exposure to the counterparty into account when estimating EE. If the bank recognizes this reduction in exposure to the counterparty in its estimate of EE, it must also use its internal model to estimate a separate EAD for the bank's exposure to the protection provider of the credit derivative.
The EAD for instruments with counterparty credit risk must be determined assuming economic downturn conditions. To accomplish this determination in a prudent manner, the internal models methodology sets EAD equal to EPE multiplied by a scaling factor termed “alpha.” Alpha is set at 1.4; a bank's primary Federal supervisor has the flexibility to raise this value based on the bank's specific characteristics of counterparty credit risk. In addition, with supervisory approval, a bank may use its own estimate of alpha, subject to a floor of 1.2.
In the proposal, the agencies requested comment on all aspects of the effective EPE approach to counterparty credit risk and, in particular, on the appropriateness of the monotonically increasing effective EE function, the alpha constant of 1.4, and the floor on internal estimates of alpha of 1.2. Commenters expressed a number of objections to the proposed rule's internal models methodology.
Several commenters contended that banks that use the internal models methodology should be permitted to calculate effective EPE at the counterparty level and should not be required to calculate effective EPE at the netting set level. These commenters indicated that while the New Accord mandates calculation at the netting set level, those banks that currently use an EPE-style approach to measuring counterparty credit risk for internal risk management purposes typically use a counterparty-by-counterparty EPE approach. They asserted that forcing banks to use a netting-set-by-netting-set approach would be burdensome for banks and would provide the agencies no material regulatory benefits, as netting effects are taken into account in the calculation of EE.
The agencies have retained the netting set focus of the calculation of effective EPE to preserve international consistency. The agencies will continue to review the implications, particularly with respect to the appropriate recognition of netting benefits, of allowing banks to calculate effective EPE at the counterparty level.
One commenter objected to the proposed rule's requirement that a bank use effective EE (as opposed to EE). This commenter contended that effective EE is an excessively conservative and imprecise mechanism to address rollover risk in a portfolio of short-term transactions. The commenter represented that rollover risk should be addressed under Pillar 2 rather than Pillar 1. The agencies continue to believe that rollover risk is a core credit risk that should be covered by explicit risk-based capital requirements. The agencies also remain concerned that EE and EPE (as opposed to effective EE and effective EPE) would not adequately incorporate rollover risk and do not believe that bank internal estimates of rollover risk are sufficiently reliable at this time to use for risk-based capital purposes. To ensure consistency with the New Accord and in light of the lack of alternative prudent mechanisms to incorporate rollover risk, the agencies continue to include effective EE and effective EPE in the final rule.
Several commenters criticized the default alpha of 1.4 and the 1.2 floor on internal estimates of alpha. These commenters contended that these supervisory alphas were too conservative for many dealer banks with large, diverse, and granular portfolios of repo-style transactions, eligible margin
Similar to the proposal, under the final rule a bank's primary Federal supervisor must determine that the bank meets certain qualifying criteria before the bank may use the internal models methodology. These criteria consist of the following operational requirements, modeling standards, and model validation requirements.
First, the bank must have the systems capability to estimate EE on a daily basis. While this requirement does not require the bank to report EE daily, or even estimate EE daily, the bank must demonstrate that it is capable of performing the estimation daily.
Second, the bank must estimate EE at enough future time points to accurately reflect all future cash flows of contracts in the netting set. To accurately reflect the exposure arising from a transaction, the model should incorporate those contractual provisions, such as reset dates, that can materially affect the timing, probability, or amount of any payment. The requirement reflects the need for an accurate estimate of EPE. However, in order to balance the ability to calculate exposures with the need for information on timely basis, the number of time points is not specified.
Third, the bank must have been using an internal model that broadly meets the minimum standards to calculate the distributions of exposures upon which the EAD calculation is based for a period of at least one year prior to approval. This requirement is to ensure that the bank has integrated the modeling into its counterparty credit risk management process.
Fourth, the bank's model must account for the non-normality of exposure distribution where appropriate. Non-normality of exposure distribution means high loss events occur more frequently than would be expected on the basis of a normal distribution, the statistical term for which is leptokurtosis. In many instances, there may not be a need to account for this. Expected exposures are much less likely to be affected by leptokurtosis than peak exposures or high percentile losses. However, the bank must demonstrate that its EAD measure is not affected by leptokurtosis or must account for it within the model.
Fifth, the bank must measure, monitor, and control the exposure to a counterparty over the whole life of all contracts in the netting set, in addition to accurately measuring and actively monitoring the current exposure to counterparties. The bank should exercise active management of both existing exposure and exposure that could change in the future due to market moves.
Sixth, the bank must be able to measure and manage current exposures gross and net of collateral held, where appropriate. The bank must estimate expected exposures for OTC derivative contracts both with and without the effect of collateral agreements. By contrast, under the proposed rule, a bank would have to measure and manage current exposure gross and net of collateral held. Some commenters criticized this requirement as inconsistent with the New Accord and bank internal risk management practices. The agencies agree and have revised the rule to only require a bank to “be able to” measure and manage current exposures gross and net of collateral.
Seventh, the bank must have procedures to identify, monitor, and control specific wrong-way risk throughout the life of an exposure. In this context, wrong-way risk is the risk that future exposure to a counterparty will be high when the counterparty's probability of default is also high. Wrong-way risk generally arises from events specific to the counterparty, rather than broad market downturns.
Eighth, the data used by the bank should be adequate for the measurement and modeling of the exposures. In particular, the model must use current market data to compute current exposures. When a bank uses historical data to estimate model parameters, the bank must use at least three years of data that cover a wide range of economic conditions. This requirement reflects the longer horizon for counterparty credit risk exposures compared to market risk exposures. The data must be updated at least quarterly or more frequently if market conditions warrant. Banks should consider using model parameters based on forward looking measures, where appropriate.
Ninth, the bank must subject its models used in the calculation of EAD to an initial validation and annual model review process. The model review should consider whether the inputs and risk factors, as well as the model outputs, are appropriate. The review of outputs should include a rigorous program of backtesting model outputs against realized exposures.
Like corporate loan exposures, counterparty exposure on netting sets is susceptible to changes in economic value that stem from deterioration in the counterparty's creditworthiness short of default. The effective maturity parameter (M) reflects the impact of these changes on capital. The formula used to compute M for netting sets with maturities greater than one year must be different than that generally applied to wholesale exposures in order to reflect how counterparty credit exposures change over time. The final rule's definition of M under the internal models methodology is identical to that of the proposed rule and is based on a weighted average of expected exposures over the life of the transactions relative to their one year exposures. Consistent with the New Accord, the final rule expands upon the proposal by providing that a bank that uses an internal model to calculate a one-sided credit valuation adjustment may use the effective credit duration estimated by the model as M(EPE) in place of the formula in the paragraph below.
If the remaining maturity of the exposure or the longest-dated contract contained in a netting set is greater than one year, the bank must set M for the exposure or netting set equal to the lower of 5 years or M(EPE), where:
If the remaining maturity of the exposure or the longest-dated contract in the netting set is one year or less, the bank must set M for the exposure or netting set equal to one year except as provided in section 31(d)(7) of the rule. In this case, repo-style transactions, eligible margin loans, and collateralized OTC derivative transactions subject to daily remargining agreements may use the effective maturity of the longest maturity transaction in the netting set as M.
The provisions of the final rule on collateral agreements under the internal models methodology are the same as those of the proposed rule. Under the final rule, if a bank has prior written approval from its primary Federal supervisor, it may capture within its internal model the effect on EAD of a collateral agreement that requires receipt of collateral when exposure to the counterparty increases. In no circumstances, however, may a bank take into account in EAD collateral agreements triggered by deterioration of counterparty credit quality. Several commenters asked the agencies to permit banks to incorporate in EAD collateral agreements that are dependent on a decline in the external rating of the counterparty. The agencies do not believe that banks are able to model the necessary correlations with sufficient reliability to accept these types of collateral agreements under the internal models methodology at this time.
In the context of the internal models methodology, the rule defines a collateral agreement as a legal contract that: (i) Specifies the time when, and circumstances under which, the counterparty is required to exchange collateral with the bank for a single financial contract or for all financial contracts covered under a qualifying master netting agreement; and (ii) confers upon the bank a perfected, first priority security interest (notwithstanding the prior security interest of any custodial agent), or the legal equivalent thereof, in the collateral posted by the counterparty under the agreement. This security interest must provide the bank with a right to close out the financial positions and the collateral upon an event of default of or failure to perform by the counterparty under the collateral agreement. A contract would not satisfy this requirement if the bank's exercise of rights under the agreement may be stayed or avoided under applicable law in the relevant jurisdictions.
If a bank's internal model does not capture the effects of collateral agreements, the final rule provides a “shortcut” method to provide the bank with some benefit, in the form of a smaller EAD, for collateralized counterparties. Under the shortcut method, effective EPE is the lesser of a threshold amount (linked to the exposure amount at which a counterparty must post collateral) plus an add-on and effective EPE without a collateral agreement. Although any bank may use this “shortcut” method under the internal models methodology, the agencies expect banks that make extensive use of collateral agreements to develop the modeling capacity to measure the impact of such agreements on EAD. The shortcut method provided in the final rule is identical to the shortcut method provided in the proposed rule.
Under the final rule, consistent with the proposed rule, a bank using the internal models methodology may use an alternative method to determine EAD for certain transactions, provided that the bank can demonstrate to its primary Federal supervisor that the method's output is more conservative than an alpha of 1.4 (or higher) times effective EPE.
Use of an alternative method may be appropriate where a new product or business line is being developed, where a recent acquisition has occurred, or where the bank believes that other more conservative methods to measure counterparty credit risk for a category of transactions are prudent. The alternative method should be applied to all similar transactions. When an alternative method is used, the bank should either treat the particular transactions concerned as a separate netting set with the counterparty or apply the alternative model to the entire original netting set.
The agencies recognize that for new OTC derivative products a bank may need a transition period during which to incorporate a new product into its internal models methodology or to demonstrate that an alternative method is more conservative than an alpha of 1.4 (or higher) times effective EPE. The final rule therefore provides that for material portfolios of new OTC derivative products, a bank may assume that the current exposure methodology in section 32(c) of the rule meets the conservatism requirement for a period not longer than 180 days. As a general matter, the agencies expect that the current exposure methodology in section 32(c) of the rule would be an acceptable, more conservative method for immaterial portfolios of OTC derivatives.
The New Accord specifies that a bank may adjust either the PD or the LGD of a wholesale exposure to reflect the risk mitigating effects of a guarantee or credit derivative. Similarly, under the final rule, as under the proposed rule, a bank may choose either a PD substitution or an LGD adjustment approach to recognize the risk mitigating effects of an eligible guarantee or eligible credit derivative on a wholesale exposure (or in certain circumstances may choose to use a double default treatment, as discussed below). In all cases a bank must use the same risk parameters for calculating ECL for a wholesale exposure as it uses for calculating the risk-based capital requirement for the exposure. Moreover, in all cases, a bank's ultimate PD and LGD for the hedged wholesale exposure may not be lower than the PD and LGD floors discussed above and described in section 31(d) of the rule.
Under the proposed rule, guarantees and credit derivatives had to meet specific eligibility requirements to be recognized as CRM for a wholesale exposure. The proposed rule defined an eligible guarantee as a guarantee that:
(i) Is written and unconditional;
(ii) Covers all or a pro rata portion of all contractual payments of the obligor on the reference exposure;
(iii) Gives the beneficiary a direct claim against the protection provider;
(iv) Is non-cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(v) Is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced; and
(vi) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure without first requiring the beneficiary to demand payment from the obligor.
Commenters suggested a number of improvements to the proposed definition of eligible guarantee. One commenter asked the agencies to clarify that the unconditionality requirement in criterion (i) of the definition would be interpreted consistently with the New Accord's requirement that “there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due.”
This same commenter also asked the agencies to revise the second criterion of the definition from coverage of “all or a pro rata portion of all contractual payments of the obligor on the reference exposure” to coverage of “all or a pro rata portion of all principal or due and payable amounts on the reference exposure.” The agencies have decided to preserve the second criterion of the eligible guarantee definition without change to ensure that a bank only obtains CRM benefits from credit risk mitigants that cover all sources of credit exposure to the obligor. Although it is appropriate to provide partial CRM benefits under the wholesale framework for partial but pro rata guarantees of all contractual payments, the agencies are less comfortable with providing partial CRM benefits under the wholesale framework where the extent of the loss coverage of the credit exposure is not so easily quantifiable. Accordingly, for example, if a bank obtains a principal-only or interest-only guarantee of a corporate bond, the guarantee will not qualify as an eligible guarantee and the bank will not be able to obtain any CRM benefits from the guarantee.
Some commenters asked the agencies to modify the fourth criterion of the eligible guarantee definition to clarify, consistent with the New Accord, that a guarantee that is terminable by the bank and the protection provider by mutual consent may qualify as an eligible guarantee. This is an appropriate clarification of the definition and, therefore, the agencies have amended the fourth criterion of the definition to require that the guarantee be non-cancelable by the protection provider unilaterally.
One commenter asked the agencies to modify the fifth criterion of the eligible guarantee definition, which requires the guarantee to be legally enforceable in a jurisdiction where the protection provider has sufficient assets, by deleting the word “sufficient.” The agencies have preserved the fifth criterion of the proposed definition intact. The agencies do not think that it would be consistent with safety and soundness to permit a bank to obtain CRM benefits under the rule if the guarantee were not legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient available assets.
Finally, some commenters objected to the sixth and final criterion of the eligible guarantee definition, which requires the protection provider to make payments to the beneficiary upon default of the obligor without first requiring the beneficiary to demand payment from the obligor. The agencies have decided to modify this criterion to make it more consistent with the New Accord and actual market practice. The final rule's sixth criterion requires only that the guarantee permit the bank to obtain payment from the protection provider in the event of an obligor default in a timely manner and without first having to take legal actions to pursue the obligor for payment.
The agencies also have performed additional analysis and review of the definition of eligible guarantee and have decided to add two additional criteria to the definition. The first additional criterion prevents guarantees from certain affiliated companies from being eligible guarantees. Under the final rule, a guarantee will not be an eligible guarantee if the protection provider is an affiliate of the bank (other than an affiliated depository institution, bank, securities broker or dealer, or insurance company that does not control the bank and that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies). For purposes of the definition, an affiliate of a bank is defined as a company that controls, is controlled by, or is under common control with, the bank. Control of a company is defined as (i) ownership, control, or holding with power to vote 25 percent or more of a class of voting securities of the company; or (ii) consolidation of the company for financial reporting purposes.
The strong correlations among the financial conditions of affiliated parties would typically render guarantees from affiliates of the bank of little value precisely when the bank would need them most—when the bank itself is in financial distress.
The agencies have decided, however, that a bank should be able to recognize CRM benefits by obtaining a guarantee from an affiliated insured depository institution, bank, securities broker or dealer, or insurance company that does not control the bank and that is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be). A
The second additional criterion precludes a guarantee from eligible guarantee status if the guarantee increases the beneficiary's cost of credit protection in response to deterioration in the credit quality of the reference exposure. This additional criterion is consistent with the New Accord's treatment of guarantees and with the proposed rule's operational requirements for synthetic securitizations.
The proposed rule defined an eligible credit derivative as a credit derivative in the form of a credit default swap, n
(i) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(ii) Any assignment of the contract has been confirmed by all relevant parties;
(iii) If the credit derivative is a credit default swap or n
(A) Failure to pay any amount due under the terms of the reference exposure (with a grace period that is closely in line with the grace period of the reference exposure); and
(B) Bankruptcy, insolvency, or inability of the obligor on the reference exposure 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;
(iv) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(v) 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;
(vi) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of the exposure provide that any required consent to transfer may not be unreasonably withheld;
(vii) If the credit derivative is a credit default swap or n
(viii) If the credit derivative is a total return swap and the bank records net payments received on the swap as net income, the bank records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves).
Commenters generally supported the proposed rule's definition of eligible credit derivative, but two commenters asked for a series of changes. These commenters asked that the final rule specifically reference contingent credit default swaps (CCDSs) in the list of eligible forms of credit derivatives. CCDS are a relatively new type of credit derivative, and the agencies are still considering their appropriate role within the risk-based capital rules. However, to enable the rule to adapt to future market innovations, the agencies have revised the definition of eligible credit derivative to add to the list of eligible credit derivative forms “any other form of credit derivative approved by” the bank's primary Federal supervisor.
One commenter asked that the agencies amend the third criterion of the eligible credit derivative definition, which applies to credit default swaps and n
Finally, a commenter asked for clarification of the meaning of the sixth criterion of the definition of eligible credit derivative, which states that if the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of the exposure provide that any required consent to transfer may not be unreasonably withheld. To address any potential ambiguity about which exposure's transferability must be analyzed, the agencies have amended the sixth component to read: “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 must provide that any required consent to transfer may not be unreasonably withheld.”
The proposed rule also provided that a bank may recognize an eligible credit derivative that hedges an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event only if:
(i) The reference exposure ranks pari passu (that is, equal) or junior to the hedged exposure; and
(ii) The reference exposure and the hedged exposure are exposures to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place.
One commenter acknowledged that the proposal's pari passu ceiling is consistent with the New Accord but asked for clarification that the provision only requires reference exposure equality or subordination with respect to priority of payments. Although the agencies have concluded that it is not necessary to amend the rule to provide this clarification, the agencies agree that the pari passu ceiling relates to priority of payments only.
Two commenters also asked the agencies to provide an exception to the cross-default/cross-acceleration requirement where the hedged exposure is an OTC derivative contract or a qualifying master netting agreement that covers OTC derivative contracts.
Under the PD substitution approach of the final rule, as under the proposal, if the protection amount (as defined below) of the eligible guarantee or eligible credit derivative is greater than or equal to the EAD of the hedged exposure, a bank may substitute for the PD of the hedged exposure the PD associated with the rating grade of the protection provider. If the bank determines that full substitution leads to an inappropriate degree of risk mitigation, the bank may substitute a higher PD for that of the protection provider.
If the guarantee or credit derivative provides the bank with the option to receive immediate payout on triggering the protection, then the bank must use the lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative. If the guarantee or credit derivative does not provide the bank with the option to receive immediate payout on triggering the protection (and instead provides for the guarantor to assume the payment obligations of the obligor over the remaining life of the hedged exposure), the bank must use the LGD of the guarantee or credit derivative.
If the protection amount of the eligible guarantee or eligible credit derivative is less than the EAD of the hedged exposure, however, the bank must treat the hedged exposure as two separate exposures (protected and unprotected) to recognize the credit risk mitigation benefit of the guarantee or credit derivative. The bank must calculate its risk-based capital requirement for the protected exposure under section 31 of the rule (using a PD equal to the protection provider's PD, an LGD determined as described above, and an EAD equal to the protection amount of the guarantee or credit derivative). If the bank determines that full substitution leads to an inappropriate degree of risk mitigation, the bank may use a higher PD than that of the protection provider. The bank must calculate its risk-based capital requirement for the unprotected exposure under section 31 of the rule (using a PD equal to the obligor's PD, an LGD equal to the hedged exposure's LGD not adjusted to reflect the guarantee or credit derivative, and an EAD equal to the EAD of the original hedged exposure minus the protection amount of the guarantee or credit derivative).
The protection amount of an eligible guarantee or eligible credit derivative is defined as the effective notional amount of the guarantee or credit derivative reduced by any applicable haircuts for maturity mismatch, lack of restructuring, and currency mismatch (each described below). The effective notional amount of a guarantee or credit derivative is the lesser of the contractual notional amount of the credit risk mitigant and the EAD of the hedged exposure, multiplied by the percentage coverage of the credit risk mitigant. For example, the effective notional amount of a guarantee that covers, on a pro rata basis, 40 percent of any losses on a $100 bond would be $40.
The agencies received no material comments on the above-described structure of the PD substitution approach, and the final rule's PD substitution approach is substantially the same as that of the proposed rule.
Under the LGD adjustment approach of the final rule, as under the proposal, if the protection amount of the eligible guarantee or eligible credit derivative is greater than or equal to the EAD of the hedged exposure, the bank's risk-based capital requirement for the hedged exposure is the greater of (i) the risk-based capital requirement for the exposure as calculated under section 31 of the rule (with the LGD of the exposure adjusted to reflect the guarantee or credit derivative); or (ii) the risk-based capital requirement for a direct exposure to the protection provider as calculated under section 31 of the rule (using the bank's PD for the protection provider, the bank's LGD for the guarantee or credit derivative, and an EAD equal to the EAD of the hedged exposure).
If the protection amount of the eligible guarantee or eligible credit derivative is less than the EAD of the hedged exposure, however, the bank must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative. The bank's risk-based capital requirement for the protected exposure would be the greater of (i) the risk-based capital requirement for the protected exposure as calculated under section 31 of the rule (with the LGD of the exposure adjusted to reflect the guarantee or credit derivative and EAD set equal to the protection amount of the guarantee or credit derivative); or (ii) the risk-based capital requirement for a direct exposure to the protection provider as calculated under section 31 of the rule (using the bank's PD for the protection provider, the bank's LGD for the guarantee or credit derivative, and an EAD set equal to the protection amount of the guarantee or credit derivative). The bank must calculate its risk-based capital requirement for the unprotected exposure under section 31 of the rule using a PD set equal to the obligor's PD, an LGD set equal to the hedged exposure's LGD (not adjusted to reflect the guarantee or credit derivative), and an EAD set equal to the EAD of the original hedged exposure minus the protection amount of the guarantee or credit derivative.
The agencies received no material comments on the above-described structure of the LGD adjustment approach, and the final rule's LGD adjustment approach is substantially the same as that of the proposed rule.
The PD substitution approach allows a bank to effectively assess risk-based capital against a hedged exposure as if it were a direct exposure to the protection provider, and the LGD adjustment approach produces a risk-based capital requirement for a hedged exposure that is never lower than that of a direct exposure to the protection provider. Accordingly, these approaches do not fully reflect the risk mitigation benefits certain types of guarantees and
Under the final rule, a bank that seeks to reduce the risk-based capital requirement on a wholesale exposure by recognizing an eligible guarantee or eligible credit derivative must adjust the effective notional amount of the credit risk mitigant downward to reflect any maturity mismatch between the hedged exposure and the credit risk mitigant. A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
The proposed rule provided, consistent with the New Accord, that when the hedged exposures have different residual maturities, the longest residual maturity of any of the hedged exposures would be used as the residual maturity of all hedged exposures. One commenter criticized this provision as excessively conservative. The agencies agree and have decided to restrict the application of this provision to securitization CRM.
The residual maturity of a hedged exposure is the longest possible remaining time before the obligor is scheduled to fulfil its obligation on the exposure. When determining the residual maturity of the guarantee or credit derivative, embedded options that may reduce the term of the credit risk mitigant must be taken into account so that the shortest possible residual maturity for the credit risk mitigant is used to determine the potential maturity mismatch. Where a call is at the discretion of the protection provider, the residual maturity of the guarantee or credit derivative is the first call date. If the call is at the discretion of the bank purchasing the protection, but the terms of the arrangement at inception of the guarantee or credit derivative contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. For example, where there is a step-up in the cost of credit protection in conjunction with a call feature or where the effective cost of protection increases over time even if credit quality remains the same or improves, the residual maturity of the credit risk mitigant is the remaining time to the first call.
Eligible guarantees and eligible credit derivatives with maturity mismatches may only be recognized if their original maturities are equal to or greater than one year. As a result, a guarantee or credit derivative is not recognized for a hedged exposure with an original maturity of less than one year unless the credit risk mitigant has an original maturity of equal to or greater than one year or an effective residual maturity equal to or greater than that of the hedged exposure. In all cases, credit risk mitigants with maturity mismatches may not be recognized when they have an effective residual maturity of three months or less.
When a maturity mismatch exists, a bank must apply the following maturity mismatch adjustment to determine the effective notional amount of the guarantee or credit derivative adjusted for maturity mismatch: Pm = E × (t−0.25)/(T−0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = lesser of T or effective residual maturity of the credit risk mitigant, expressed in years; and
(iv) T = lesser of 5 or effective residual maturity of the hedged exposure, expressed in years.
Other than as discussed above with respect to pools of hedged exposures with different residual maturities, the final rule's provisions on maturity mismatch do not differ from those of the proposed rule.
Under the final rule, as under the proposed rule, a bank that seeks to recognize an eligible credit derivative that does not include a distressed restructuring as a credit event that triggers payment under the derivative must reduce the recognition of the credit derivative by 40 percent. A distressed restructuring is a restructuring of the hedged exposure involving forgiveness or postponement of principal, interest, or fees that results in a charge-off, specific provision, or other similar debit to the profit and loss account.
In other words, the effective notional amount of the credit derivative adjusted for lack of restructuring credit event (and maturity mismatch, if applicable) is: Pr = Pm × 0.60, where:
(i) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring credit event (and maturity mismatch, if applicable); and
(ii) Pm = effective notional amount of the credit risk mitigant adjusted for maturity mismatch (if applicable).
Two commenters opposed the 40 percent restructuring haircut. One commenter contended that the 40 percent haircut is too punitive. The other commenter contended that the 40 percent haircut should not apply when the hedged exposure is an OTC derivative contract or a qualifying master netting agreement that covers OTC derivative contracts. The 40 percent haircut is a rough estimate of the reduced CRM benefits that accrue to a bank that purchases a credit derivative without restructuring coverage. Nonetheless, the agencies recognize that restructuring events could result in substantial economic losses to a bank. Moreover, the 40 percent haircut is consistent with the New Accord and is a reasonably prudent mechanism for ensuring that banks do not receive excessive CRM benefits for purchasing credit protection that does not cover all material sources of economic loss to the bank on the hedged exposure.
The final rule's provisions on lack of restructuring as a credit event do not differ from those of the proposed rule.
Under the final rule, as under the proposed rule, where the eligible guarantee or eligible credit derivative is denominated in a currency different from that in which any hedged exposure is denominated, the effective notional amount of the guarantee or credit derivative must be adjusted for currency mismatch (and maturity mismatch and lack of restructuring credit event, if applicable). The adjusted effective notional amount is calculated as: Pc = Pr × (1−Hfx), where:
(i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring credit event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring credit event, if applicable); and
(iii) Hfx = haircut appropriate for the currency mismatch between the credit risk mitigant and the hedged exposure.
A bank may use a standard supervisory haircut of 8 percent for Hfx (based on a ten-business-day holding period and daily marking-to-market and remargining). Alternatively, a bank may use internally estimated haircuts for Hfx based on a ten-business-day holding period and daily marking-to-market and remargining if the bank qualifies to use the own-estimates haircuts in paragraph (b)(2)(iii) of section 32, the simple VaR methodology in paragraph (b)(3) of section 32, or the internal models methodology in paragraph (d) of section 32 of the rule. The bank must scale these haircuts up using a square root of time formula if the bank revalues the guarantee or credit derivative less frequently than once every ten business days.
The agencies received no comments on the currency mismatch provisions discussed above, and the final rule's provisions on currency mismatch do not differ from those of the proposed rule.
Assume that a bank holds a five-year $100 corporate exposure, purchases a $100 credit derivative to mitigate its credit risk on the exposure, and chooses to use the PD substitution approach. The unsecured LGD of the corporate exposure is 30 percent; the LGD of the credit derivative is 80 percent. The credit derivative is an eligible credit derivative, has the bank's exposure as its reference exposure, has a three-year maturity, no restructuring provision, no currency mismatch with the bank's hedged exposure, and the protection provider assumes the payment obligations of the obligor upon default. The effective notional amount and initial protection amount of the credit derivative would be $100. The maturity mismatch would reduce the protection amount to $100 × (3−.25)÷(5−.25) or $57.89. The haircut for lack of restructuring would reduce the protection amount to $57.89 × 0.6 or $34.74. So the bank would treat the $100 corporate exposure as two exposures: (i) An exposure of $34.74 with the PD of the protection provider, an LGD of 80 percent, and an M of five; and (ii) an exposure of $65.26 with the PD of the obligor, an LGD of 30 percent, and an M of five.
The New Accord provides that if multiple credit risk mitigants (for example, two eligible guarantees) cover a single exposure, a bank must disaggregate the exposure into portions covered by each credit risk mitigant (for example, the portion covered by each guarantee) and must calculate separately the risk-based capital requirement of each portion.
Commenters generally agreed that the agencies should provide additional guidance about how to address situations where multiple credit risk mitigants cover a single exposure. Although one commenter recommended that the agencies permit banks effectively to recognize triple default benefits in situations where two credit risk mitigants cover a single exposure, commenters did not provide material specific suggestions as to their preferred approach to addressing these situations. Thus, the agencies have decided to adopt the New Accord's principles for dealing with multiple credit risk mitigant situations. The agencies have added several additional provisions to section 33(a) of the final rule to provide clarity in this area.
As noted above, the final rule, like the proposed rule, contains a separate risk-based capital methodology for hedged exposures eligible for double default treatment. The final rule's double default provisions are identical to those of the proposed rule, with the exception of some limited changes to the definition of an eligible double default guarantor discussed below.
To be eligible for double default treatment, a hedged exposure must be fully covered or covered on a pro rata basis (that is, there must be no tranching of credit risk) by an uncollateralized single-reference-obligor credit derivative or guarantee (or certain n
The proposed rule defined eligible double default guarantor to include a depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)); a bank holding company (as defined in section 2 of the Bank Holding Company Act (12 U.S.C. 1841)); a savings and loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of the holding company's activities are permissible for a financial holding company under 12 U.S.C. 1843(k)); a securities broker or dealer registered (under the Securities Exchange Act of 1934) with the Securities and Exchange Commission (SEC); an insurance company in the business of providing credit protection (such as a monoline bond insurer or re-insurer) that is subject to supervision by a state insurance regulator; a foreign bank (as defined in section 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)); a non-U.S. securities firm; or a non-U.S. based insurance company in the business of providing credit protection. The proposal required an eligible double default guarantor to (i) have a bank-assigned PD that, at the time the guarantor issued the guarantee or credit derivative, was equal to or lower than the PD associated with a long-term external rating of at least the third highest investment-grade rating category; and (ii) have a current bank-assigned PD that is equal to or lower than the PD associated with a long-term external rating of at least investment grade. In addition, the proposal permitted a non-U.S. based bank, securities firm, or insurance company to qualify as an eligible double default guarantor only if the firm were subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities firms, or insurance companies (as the case may be) or had issued an
Commenters expressed two principal criticisms of the proposed definition of an eligible double default guarantor. First, commenters asked the agencies to conform the definition to the New Accord by permitting a foreign financial firm to qualify so long as it had an outstanding long-term debt security with an external rating of investment grade or higher (for example, BBB− or higher) instead of in one of the three highest investment-grade rating categories (for example, A− or higher). In light of the other eligibility criteria, the agencies have concluded that it would be appropriate to conform this provision of the definition to the New Accord.
Commenters also requested that the agencies conform the definition of eligible double default guarantor to the New Accord by permitting a financial firm to qualify so long as it had a bank-assigned PD, at the time the guarantor issued the guarantee or credit derivative or at any time thereafter, that was equal to or lower than the PD associated with a long-term external rating of at least the third highest investment-grade rating category. In light of the other eligibility criteria, the agencies have concluded that it would be appropriate to conform this provision of the definition to the New Accord.
Effectively, under the final rule, the scope of an eligible double default guarantor is limited to financial firms whose normal business includes the provision of credit protection, as well as the management of a diversified portfolio of credit risk. This restriction arises from the agencies' concern to limit double default recognition to financial institutions that have a high level of credit risk management expertise and that provide sufficient market disclosure. The restriction is also designed to limit the risk of excessive correlation between the creditworthiness of the guarantor and the obligor of the hedged exposure due to their performance depending on common economic factors beyond the systematic risk factor. As a result, hedged exposures to potential credit protection providers or affiliates of credit protection providers are not eligible for the double default treatment. In addition, the agencies have excluded hedged exposures to sovereign entities from eligibility for double default treatment because of the potential high correlation between the creditworthiness of a sovereign and that of a guarantor.
One commenter urged the agencies to delete the requirement that the obligor of a hedged exposure that qualifies for double default treatment not be an eligible double default guarantor or an affiliate of such an entity. This commenter represented that this requirement significantly constrained the scope of application of double default treatment and assumed inappropriately that there is an excessive amount of correlation among all financial firms. The agencies acknowledge that this requirement is a crude mechanism to prevent excessive wrong-way risk, but the agencies have decided to retain the requirement in light of its consistency with the New Accord and the limited ability of banks to measure accurately correlations among obligors.
In addition to limiting the types of guarantees, credit derivatives, guarantors, and hedged exposures eligible for double default treatment, the rule limits wrong-way risk further by requiring a bank to implement a process to detect excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. The bank must receive prior written approval from its primary Federal supervisor for this process in order to recognize double default benefits for risk-based capital purposes. To apply double default treatment to a particular hedged exposure, the bank must determine that there is not excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. For example, the creditworthiness of an obligor and a protection provider would be excessively correlated if the obligor derives a high proportion of its income or revenue from transactions with the protection provider. If excessive correlation is present, the bank may not use the double default treatment for the hedged exposure.
The risk-based capital requirement for a hedged exposure subject to double default treatment is calculated by multiplying a risk-based capital requirement for the hedged exposure (as if it were unhedged) by an adjustment factor that considers the PD of the protection provider (see section 34 of the rule). Thus, the PDs of both the obligor of the hedged exposure and the protection provider are factored into the hedged exposure's risk-based capital requirement. In addition, as under the PD substitution treatment in section 33 of the rule, the bank is allowed to set LGD equal to the lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) or the LGD of the guarantee or credit derivative if the guarantee or credit derivative provides the bank with the option to receive immediate payout on the occurrence of a credit event. Otherwise, the bank must set LGD equal to the LGD of the guarantee or credit derivative. Accordingly, in order to apply the double default treatment, the bank must estimate a PD for the protection provider and an LGD for the guarantee or credit derivative. Finally, a bank using the double default treatment must make applicable adjustments to the protection amount of the guarantee or credit derivative to reflect maturity mismatches, currency mismatches, and lack of restructuring coverage (as under the PD substitution and LGD adjustment approaches in section 33 of the rule).
One commenter objected that the calibration of the double default formula under the proposed rule was too conservative because it assumed an excessive amount of correlation between the obligor of the hedged exposure and the protection provider. The agencies have decided to leave the calibration unaltered in light of its consistency with the New Accord. The agencies will evaluate this decision over time and will raise this issue with the BCBS if appropriate.
Like the proposal, the final rule provides a different treatment for guarantees and credit derivatives that cover retail exposures than for those that cover wholesale exposures. The approach set forth above for guarantees and credit derivatives that cover wholesale exposures is an exposure-by-exposure approach consistent with the overall exposure-by-exposure approach the rule takes to wholesale exposures. The agencies believe that a different treatment for guarantees that cover retail exposures is necessary and appropriate because of the rule's segmentation approach to retail exposures. The approaches to retail guarantees described in this section generally apply only to guarantees of individual retail exposures. Guarantees of multiple retail exposures (such as pool private mortgage insurance (PMI)) are typically tranched (that is, they cover less than the full amount of the hedged exposures) and, therefore, are securitization exposures under the final rule.
The rule does not specify the ways in which guarantees and credit derivatives may be taken into account in the segmentation of retail exposures.
In the proposal, the agencies expressed some concern, however, that this approach would provide banks with substantial discretion to incorporate double default and double recovery effects. To address these concerns, the preamble to the proposed rule described two possible alternative treatments for guarantees of retail exposures. The first alternative distinguished between eligible retail guarantees and all other (non-eligible) guarantees of retail exposures. Under this alternative, an eligible retail guarantee would be an eligible guarantee that applies to a single retail exposure and is (i) PMI issued by a highly creditworthy insurance company; or (ii) issued by a sovereign entity or a political subdivision of a sovereign entity.
Under this alternative, a bank would be able to recognize the credit risk mitigation benefits of eligible retail guarantees that cover retail exposures in a segment by adjusting its estimates of LGD for the segment to reflect recoveries from the guarantor. However, the bank would have to estimate the PD of a segment without reflecting the benefit of guarantees. Specifically, a segment's PD would be an estimate of the stand-alone probability of default for the retail exposures in the segment, before taking account of any guarantees. Accordingly, for this limited set of traditional guarantees of retail exposures by high credit quality guarantors, a bank would be allowed to recognize the benefit of the guarantee when estimating LGD but not when estimating PD.
This alternative approach would provide a different treatment for non-eligible retail guarantees. In short, within the retail framework, a bank would not be able to recognize non-eligible retail guarantees when estimating PD and LGD for any segment of retail exposures. A bank would be required to estimate PD and LGD for segments containing retail exposures with non-eligible guarantees as if the exposures were not guaranteed. However, a bank would be permitted to recognize non-eligible retail guarantees provided by a wholesale guarantor by treating the hedged retail exposure as a direct exposure to the guarantor and applying the appropriate wholesale IRB risk-based capital formula. In other words, for retail exposures covered by non-eligible retail guarantees, a bank would be permitted to reflect the guarantee by “desegmenting” the retail exposures (which effectively would convert the retail exposures into wholesale exposures) and then applying the rules set forth above for guarantees that cover wholesale exposures. Thus, under this approach, a bank would not be allowed to recognize either double default or double recovery effects for non-eligible retail guarantees.
A second alternative that the agencies described in the preamble to the proposed rule would permit a bank to recognize the credit risk mitigation benefits of all eligible guarantees (whether eligible retail guarantees or not) that cover retail exposures by adjusting its estimates of LGD for the relevant segments, but would subject a bank's risk-based capital requirement for a segment of retail exposures that are covered by one or more non-eligible retail guarantees to a floor. Under this second alternative, the agencies could impose a floor on risk-based capital requirements of between 2 percent and 6 percent on such a segment of retail exposures.
A substantial number of commenters supported the flexible approach in the text of the proposed rule. A few commenters also supported the first alternative approach in the preamble of the proposed rule. Commenters uniformly urged the agencies not to adopt the second alternative approach. The agencies have decided to adopt the approach to retail guarantees in the text of the proposed rule and not to adopt either alternative approach described in the proposed rule preamble. Although the first alternative approach addresses prudential concerns, the agencies have concluded that it is excessively conservative and prescriptive and would not harmonize with banks’ internal risk measurement and management practices. The agencies also have determined that the second alternative approach is insufficiently risk sensitive and is not consistent with the New Accord. In light of the final rule's flexible approach to retail guarantees, the agencies expect banks to limit their use of guarantees in the retail segmentation process and retail risk parameter estimation process to situations where the bank has particularly reliable data about the CRM benefits of such guarantees.
Section 35 of the final rule describes the risk-based capital requirements for unsettled and failed securities, foreign exchange, and commodities transactions. The agencies did not receive any material comments on this aspect of the proposed rule and are adopting it as proposed.
Under the final rule, certain transaction types are excluded from the scope of section 35, including:
(i) Transactions accepted by a qualifying central counterparty that are subject to daily marking-to-market and daily receipt and payment of variation margin (which do not have a risk-based capital requirement);
(ii) Repo-style transactions (the risk-based capital requirements of which are determined under sections 31 and 32 of the final rule);
(iii) One-way cash payments on OTC derivative contracts (the risk-based capital requirements of which are determined under sections 31 and 32 of the final rule); and
(iv) Transactions with a contractual settlement period that is longer than the normal settlement period (defined below), which transactions are treated as OTC derivative contracts and assessed a risk-based capital requirement under sections 31 and 32 of the final rule. The final rule also provides that, in the case of a system-wide failure of a settlement or clearing system, the bank's primary Federal supervisor may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
The final rule contains separate treatments for delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions with a normal settlement period, on the one hand, and non-DvP/non-PvP transactions with a normal settlement period, on the other hand. The final rule provides the following definitions of a DvP transaction, a PvP transaction, and a normal settlement period. A DvP transaction is a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment. A PvP transaction is a foreign exchange transaction in which each counterparty is obligated to make a final
A bank must hold risk-based capital against a DvP or PvP transaction with a normal settlement period if the bank's counterparty has not made delivery or payment within five business days after the settlement date. The bank must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the bank by the appropriate risk weight in Table E. The positive current exposure of a transaction of a bank is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the bank to the counterparty.
A bank must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the bank has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The bank must continue to hold risk-based capital against the transaction until the bank has received its corresponding deliverables. From the business day after the bank has made its delivery until five business days after the counterparty delivery is due, the bank must calculate its risk-based capital requirement for the transaction by treating the current market value of the deliverables owed to the bank as a wholesale exposure.
For purposes of computing a bank's risk-based capital requirement for unsettled non-DvP/non-PvP transactions, a bank may assign an internal obligor rating to a counterparty for which it is not otherwise required under the final rule to assign an obligor rating on the basis of the applicable external rating of any outstanding unsecured long-term debt security without credit enhancement issued by the counterparty. A bank may estimate a loss severity rating or LGD for the exposure, or may use a 45 percent LGD for the exposure provided the bank uses the 45 percent LGD for all such exposures (that is, for all non-DvP/non-PvP transactions subject to a risk-based capital requirement other than deduction under section 35 of the final rule). Alternatively, a bank may use a 100 percent risk weight for all non-DvP/non-PvP transactions subject to a risk-based capital requirement other than deduction under section 35 of the final rule.
If, in a non-DvP/non-PvP transaction with a normal settlement period, the bank has not received its deliverables by the fifth business day after counterparty delivery was due, the bank must deduct the current market value of the deliverables owed to the bank 50 percent from tier 1 capital and 50 percent from tier 2 capital.
The total risk-weighted asset amount for unsettled transactions equals the sum of the risk-weighted asset amount for each DvP and PvP transaction with a normal settlement period and the risk-weighted asset amount for each non-DvP/non-PvP transaction with a normal settlement period.
This section describes the framework for calculating risk-based capital requirements for securitization exposures (the securitization framework). In contrast to the framework for wholesale and retail exposures, the securitization framework does not permit a bank to rely on its internal assessments of the risk parameters of a securitization exposure.
The securitization framework contains three general approaches for determining the risk-based capital requirement for a securitization exposure: a ratings-based approach (RBA), an internal assessment approach (IAA), and a supervisory formula approach (SFA). Consistent with the New Accord and the proposal, under the final rule a bank generally must apply the following hierarchy of approaches to determine the risk-based capital requirement for a securitization exposure.
Under the proposed rule, a bank would deduct from tier 1 capital any after-tax gain-on-sale resulting from a securitization and would deduct from total capital any portion of a CEIO that does not constitute a gain-on-sale, as described in section 42(a)(1) and (c) of the proposed rule. Thus, if the after-tax gain-on-sale associated with a securitization equaled $100 while the amount of CEIOs associated with that same securitization equaled $120, the bank would deduct $100 from tier 1 capital and $20 from total capital ($10 from tier 1 capital and $10 from tier 2 capital).
Several commenters asserted that the proposed deductions of gains-on-sale and CEIOs were excessively conservative, because such deductions are not reflected in an originating bank's maximum risk-based capital requirement associated with a single securitization transaction (described below). Commenters noted that while securitization does not increase an originating bank's overall risk exposure to the securitized assets, in some circumstances the proposal would result in a securitization transaction increasing an originating bank's risk-based capital requirement. To address this concern, some commenters suggested deducting CEIOs from total capital only when the CEIOs constitute a gain-on-sale. Others urged adopting the treatment of CEIOs in the general risk-based capital rules. Under this treatment, the entire amount
The final rule retains the proposed deduction of gains-on-sale and CEIOs. These deductions are consistent with the New Accord, and the agencies believe they are warranted given historical supervisory concerns with the subjectivity involved in valuations of gains-on-sale and CEIOs. Furthermore, although the treatments of gains-on-sale and CEIOs can increase an originating bank's risk-based capital requirement following a securitization, the agencies believe that such anomalies will be rare where a securitization transfers significant credit risk from the originating bank to third parties.
If a securitization exposure is not a gain-on-sale or CEIO, a bank must apply the RBA to a securitization exposure if the exposure qualifies for the RBA. As a general matter, an exposure qualifies for the RBA if the exposure has an external rating from an NRSRO or has an inferred rating (that is, the exposure is senior to another securitization exposure in the transaction that has an external rating from an NRSRO).
If a securitization exposure does not qualify for the RBA but the exposure is to an ABCP program—such as a credit enhancement or liquidity facility—the bank may apply the IAA (if the bank, the exposure, and the ABCP program qualify for the IAA) or the SFA (if the bank and the exposure qualify for the SFA) to the exposure. As a general matter, a bank will qualify to use the IAA if the bank establishes and maintains an internal risk rating system for exposures to ABCP programs that has been approved by the bank's primary Federal supervisor. Alternatively, a bank may use the SFA if the bank is able to calculate a set of risk factors relating to the securitization, including the risk-based capital requirement for the underlying exposures as if they were held directly by the bank. A bank that qualifies for and chooses to use the IAA must use the IAA for all exposures that qualify for the IAA.
A number of commenters asserted that a bank should be permitted to use the IAA for a securitization exposure to an ABCP conduit even when the exposure has an inferred rating, provided all other IAA eligibility criteria were met. The commenters maintained that the RBA would produce an excessive risk-based capital requirement for an unrated securitization exposure, such as a liquidity facility, when the inferred rating is based on a rated security that is very junior to the unrated exposure. Commenters suggested that allowing a bank to use the IAA instead of the RBA in such circumstances would lead to a risk-based capital requirement that was better aligned with the unrated exposure's actual risk.
Like the New Accord, the final rule does not allow a bank to use the IAA for securitization exposures that qualify for the RBA based on an inferred rating. While in some cases the IAA might produce a more risk-sensitive capital treatment relative to an inferred rating under the RBA, the agencies—as well as the majority of commenters—believe that it is important to retain as much consistency as possible with the New Accord to provide a level international playing field for financial services providers in a competitive line of business. The commenters’ concerns relating to inferred ratings apply only to a small proportion of outstanding ABCP liquidity facilities. In many cases, a bank may mitigate such concerns by having the ABCP program issue an additional, intermediate layer of externally rated securities, which would provide a more accurate reference for inferring a rating on the unrated liquidity facility. The agencies intend to monitor developments in this area and, as appropriate, will coordinate any reassessment of the hierarchy of securitization approaches with the BCBS and other supervisory and regulatory authorities.
If a securitization exposure is not a gain-on-sale or a CEIO, does not qualify for the RBA, and is not an exposure to an ABCP program for which the bank is applying the IAA, the bank may apply the SFA to the exposure if the bank is able to calculate the SFA risk parameters for the securitization. In many cases, an originating bank would use the SFA to determine its risk-based capital requirements for retained securitization exposures.
If a securitization exposure is not a gain-on-sale or a CEIO and does not qualify for the RBA, the IAA, or the SFA, the bank must deduct the exposure from total capital.
Numerous commenters requested an alternative to deducting the securitization exposure from capital. Some of these commenters noted that if a bank does not service the underlying assets, the bank may not be able to produce highly accurate estimates of a key SFA risk parameter, K
Like the proposal, the final rule contains only those securitization approaches in the New Accord. As already noted, the agencies—and most commenters—believe that it is important to minimize substantive differences between the final rule and the New Accord to foster international consistency. Furthermore, the agencies believe that the hierarchy of securitization approaches is sufficiently comprehensive to accommodate demonstrably low-risk structured lending arrangements in a risk-sensitive manner. As described in greater detail below, for securitization exposures that are not eligible for the RBA or the IAA, a bank has flexibility under the SFA to tailor its procedures for estimating K
Total risk-weighted assets for securitization exposures equals the sum of risk-weighted assets calculated under the RBA, IAA, and SFA, plus any risk-
Consistent with the New Accord and the proposed rule, the final rule includes a mechanism that generally prevents a bank's effective risk-based capital requirement from increasing as a result of the bank securitizing its assets. Specifically, the rule limits a bank's effective risk-based capital requirement for all of its securitization exposures to a single securitization to the applicable risk-based capital requirement if the underlying exposures were held directly by the bank. Under the rule, unless one or more of the underlying exposures does not meet the definition of a wholesale, retail, securitization, or equity exposure, the total risk-based capital requirement for all securitization exposures held by a single bank associated with a single securitization (including any regulatory capital requirement that relates to an early amortization provision, but excluding any capital requirements that relate to the bank's gain-on-sale or CEIOs associated with the securitization) cannot exceed the sum of (i) the bank's total risk-based capital requirement for the underlying exposures as if the bank directly held the underlying exposures; and (ii) the bank's total ECL for the underlying exposures.
One commenter urged the agencies to delete the reference to ECL in the capital calculation. However, the agencies believe it is appropriate to include the ECL of the underlying exposures in this calculation because ECL is included in the New Accord's limit, and because the bank would have had to estimate the ECL of the exposures and hold reserves or capital against the ECL if the bank held the underlying exposures on its balance sheet.
This maximum risk-based capital requirement is different from the general risk-based capital rules. Under the general risk-based capital rules, banks generally are required to hold a dollar in capital for every dollar in residual interest, regardless of the effective risk-based capital requirement on the underlying exposures. The agencies adopted this dollar-for-dollar capital treatment for a residual interest to recognize that in many instances the relative size of the residual interest retained by the originating bank reveals market information about the quality of the underlying exposures and transaction structure that may not have been captured under the general risk-based capital rules. Given the significantly heightened risk sensitivity of the IRB approach, the agencies believe that the maximum risk-based capital requirement in the final rule is appropriate.
The securitization framework also includes provisions to limit the double counting of risks in situations involving overlapping securitization exposures. While the proposal addressed only those overlapping exposures arising in the context of exposures to ABCP programs and mortgage loan swaps with recourse, the final rule addresses overlapping exposures for securitizations more generally. If a bank has multiple securitization exposures that provide duplicative coverage of the underlying exposures of a securitization (such as when a bank provides a program-wide credit enhancement and multiple pool-specific liquidity facilities to an ABCP program), the bank is not required to hold duplicative risk-based capital against the overlapping position. Instead, the bank would apply to the overlapping position the applicable risk-based capital treatment under the securitization framework that results in the highest capital requirement. If different banks have overlapping exposures to a securitization, however, each bank must hold capital against the entire maximum amount of its exposure. Although duplication of capital requirements will not occur for individual banks, some systemic duplication may occur where multiple banks have overlapping exposures to the same securitization.
The proposed rule also addressed the risk-based capital treatment of a securitization of non-IRB assets. Claims to future music concert and film receivables are examples of financial assets that are not wholesale, retail, securitization, or equity exposures. In these cases, the SFA cannot be used because of the absence of a risk-sensitive measure of the credit risk of the underlying exposures. Specifically, under the proposed rule, if a bank had a securitization exposure and any underlying exposure of the securitization was not a wholesale, retail, securitization or equity exposure, the bank would (i) apply the RBA if the securitization exposure qualifies for the RBA and is not gain-on-sale or a CEIO; or (ii) otherwise, deduct the exposure from total capital.
Numerous commenters asserted that a bank should be allowed to use the IAA in these situations since, unlike the SFA, the IAA is tied to NRSRO rating methodologies rather than to the risk-based capital requirement for the underlying exposures. The agencies believe that this is a reasonable approach for exposures to ABCP conduits. The final rule permits a bank to use the IAA for a securitization exposure for which any underlying exposure of the securitization is not a wholesale, retail, securitization or equity exposure, provided the securitization exposure is not gain-on-sale, not a CEIO, and not eligible for the RBA, and all of the IAA qualification criteria are met.
As described in section V.A.3. of this preamble, a few commenters asserted that OTC derivatives with a securitization SPE as the counterparty should be excluded from the definition of securitization exposure. These commenters objected to the burden of using the securitization framework to calculate a capital requirement for counterparty credit risk for OTC derivatives with a securitization SPE. The agencies continue to believe that the securitization framework is the most appropriate way to assess the counterparty credit risk of such exposures, and that in many cases the relatively simple RBA will apply to such exposures. In response to commenter concerns about burden, the agencies have decided to add an optional simple risk weight approach for certain OTC derivatives. Under the final rule, if a securitization exposure is an OTC derivative contract (other than a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a bank may choose to apply an effective 100 percent risk weight to the exposure rather than the general securitization hierarchy of approaches. This treatment is subject to supervisory approval.
Like the proposed rule, the final rule contains three additional exceptions to the general hierarchy. Each exception parallels the general risk-based capital rules. First, an interest-only mortgage-backed security must be assigned a risk weight that is no less than 100 percent. Although a number of commenters objected to this risk weight floor on the grounds that it was not risk sensitive, the agencies believe that a minimum risk weight of 100 percent is prudent in light of the uncertainty implied by the substantial price volatility of these securities. Second, a sponsoring bank that qualifies as a primary beneficiary and must consolidate an ABCP program as a variable interest entity under GAAP generally may exclude the consolidated ABCP program assets from risk-
A traditional securitization typically employs a servicing bank that—on a day-to-day basis—collects principal, interest, and other payments from the underlying exposures of the securitization and forwards such payments to the securitization SPE or to investors in the securitization. Such servicing banks often provide to the securitization a credit facility under which the servicing bank may advance cash to ensure an uninterrupted flow of payments to investors in the securitization (including advances made to cover foreclosure costs or other expenses to facilitate the timely collection of the underlying exposures). These servicer cash advance facilities are securitization exposures.
Under the final rule, as under the proposed rule, a servicing bank must determine its risk-based capital requirement for any advances under such a facility using the hierarchy of securitization approaches described above. The treatment of the undrawn portion of the facility depends on whether the facility is an “eligible” servicer cash advance facility. An eligible servicer cash advance facility is a servicer cash advance facility in which (i) the servicer is entitled to full reimbursement of advances (except that a servicer may be obligated to make non-reimburseable advances for a particular underlying exposure if any such advance is limited to an insignificant amount of the outstanding principal balance of that exposure); (ii) the servicer's right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and (iii) the servicer has no legal obligation to, and does not, make advances to the securitization if the servicer concludes the advances are unlikely to be repaid. Consistent with the general risk-based capital rules with respect to residential mortgage servicer cash advances, a servicing bank is not required to hold risk-based capital against the undrawn portion of an eligible servicer cash advance facility. A bank that provides a non-eligible servicer cash advance facility must determine its risk-based capital requirement for the undrawn portion of the facility in the same manner as the bank would determine its risk-based capital requirement for any other undrawn securitization exposure.
Under the proposed rule, the amount of an on-balance sheet securitization exposure was the bank's carrying value, if the exposure was held-to-maturity or for trading, or the bank's carrying value minus any unrealized gains and plus any unrealized losses on the exposure, if the exposure was available-for-sale. In general, the amount of an off-balance sheet securitization exposure was the notional amount of the exposure. For an OTC derivative contract that was not a credit derivative, the notional amount was the EAD of the derivative contract (as calculated in section 32).
In the final rule the agencies are maintaining the substance of the proposed provision on the amount of a securitization exposure with one exception. The final rule provides that the amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or OTC derivative (other than a credit derivative) is the EAD of the exposure as calculated in section 32 of the final rule. The agencies believe this change is consistent with the way banks manage these exposures, more appropriately reflects the collateral that directly supports these exposures, and recognizes the credit risk mitigation benefits of netting where these exposures are part of a cross-product netting set. Because the collateral associated with a repo-style transaction or eligible margin loan is reflected in the determination of exposure amount under section 32 of the rule, these transactions are not eligible for the general securitization collateral approach in section 46(b) of the final rule. Similarly, if a bank chooses to reflect collateral associated with an OTC derivative contract in its determination of exposure amount under section 32 of the rule, it may not also apply the general securitization collateral approach in section 46(b) of the final rule. Similar to the definition of EAD for on-balance sheet exposures, the agencies are clarifying that the amount of an on-balance sheet securitization exposure is based on whether or not the exposure is classified as an available for sale security.
Under the proposal, when a securitization exposure to an ABCP program takes the form of a commitment, such as a liquidity facility, the notional amount could be reduced to the maximum potential amount that the bank currently would be required to fund under the arrangement's documentation (the maximum potential amount that could be drawn given the assets currently held by the program). Within some ABCP programs, however, certain commitments, such as liquidity facilities, may be dynamic in that the maximum amount that can be drawn at any moment depends on the current credit quality of the program's underlying assets. That is, if the underlying assets were to remain fixed, but their credit quality deteriorated, the maximum amount that could be drawn against the liquidity facility could increase.
The final rule clarifies that in such circumstances the notional amount of an off-balance sheet securitization exposure to an ABCP program may be reduced to the maximum potential amount that the bank could be required to fund given the program's current assets (calculated without regard to the current credit quality of these assets). Thus, if $100 is the maximum amount that could be drawn given the current volume and current credit quality of the program's assets, but the maximum potential draw against these same assets could increase to as much as $200 if their credit quality were to deteriorate, then the exposure amount is $200.
Some commenters recommended capping the securitization amount for an ABCP liquidity facility at the amount of the outstanding commercial paper covered by that facility. The agencies believe, however, that this would be inappropriate if the liquidity provider could be required to advance a larger amount. The agencies note that when calculating the exposure amount of a liquidity facility, a bank may take into account any limits on advances—including limits based on the amount of commercial paper outstanding—that are contained in the program's documentation.
Like the proposed rule, the final rule sets forth the regulatory capital consequences if a bank provides support to a securitization in excess of the bank's predetermined contractual obligation to provide credit support to the securitization. First, consistent with
In a traditional securitization, an originating bank typically transfers a portion of the credit risk of exposures to third parties by selling them to a securitization SPE. Under the final rule, consistent with the proposed rule, banks engaging in a traditional securitization may exclude the underlying exposures from the calculation of risk-weighted assets only if each of the following conditions is met: (i) The transfer is a sale under GAAP; (ii) the originating bank transfers to third parties credit risk associated with the underlying exposures; and (iii) any clean-up calls relating to the securitization are eligible clean-up calls (as discussed below). Originating banks that meet these conditions must hold regulatory capital against any securitization exposures they retain in connection with the securitization. Originating banks that fail to meet these conditions must hold regulatory capital against the transferred exposures as if they had not been securitized and must deduct from tier 1 capital any gain-on-sale resulting from the transaction. The operational requirements for synthetic securitization are described in preamble section V.E.7., below.
Consistent with the general risk-based capital rules, the above operational requirements refer specifically to GAAP for the purpose of determining whether a securitization transaction should be treated as an asset sale or a financing. In contrast, the New Accord stipulates guiding principles for use in determining whether sale treatment is warranted. One commenter requested that the agencies conform the proposed operational requirements for traditional securitizations to those in the New Accord. The agencies believe that the current conditions to qualify for sale treatment under GAAP are broadly consistent with the guiding principles enumerated in the New Accord. However, if GAAP in this area were to change materially in the future, the agencies would reassess, and possibly revise, the operational standards.
To satisfy the operational requirements for securitizations and enable an originating bank to exclude the underlying exposures from the calculation of its risk-based capital requirements, any clean-up call associated with a securitization must be an eligible clean-up call. The proposal defined a clean-up call as a contractual provision that permits a servicer to call securitization exposures (for example, asset-backed securities) before the stated (or contractual) maturity or call date. The preamble to the proposed rule explained that, in the case of a traditional securitization, a clean-up call is generally accomplished by repurchasing the remaining securitization exposures once the amount of underlying exposures or outstanding securitization exposures falls below a specified level. In the case of a synthetic securitization, the clean-up call may take the form of a clause that extinguishes the credit protection once the amount of underlying exposures has fallen below a specified level.
Under the proposed rule, an eligible clean-up call would be a clean-up call that:
(i) Is exercisable solely at the discretion of the servicer;
(ii) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization (for example, to purchase non-performing underlying exposures); and
(iii) (A) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding.
(B) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding.
A number of comments addressed the proposed definitions of clean-up call and eligible clean-up call. One commenter observed that prudential concerns would also be satisfied if the call were at the discretion of the originator of the underlying exposures. The agencies concur with this view and have modified the final rule to state that a clean-up call may permit the servicer or originating bank to call the securitization exposures before the stated maturity or call date, and that an eligible clean-up call must be exercisable solely at the discretion of the servicer or the originating bank. Commenters also requested clarification whether, for a securitization that involves a master trust, the 10 percent requirement described above in criteria (iii)(A) and (iii)(B) would be interpreted as applying to each series or tranche of securities issued from the master trust. The agencies believe this is a reasonable interpretation. Thus, where a securitization SPE is structured as a master trust, a clean-up call with respect to a particular series or tranche issued by the master trust would meet criteria (iii)(A) and (iii)(B) so long as the outstanding principal amount in that series was 10 percent or less of its original amount at the inception of the series.
Over the last several years, the agencies have published a significant amount of supervisory guidance to assist banks with assessing the extent to which they have transferred credit risk and, consequently, may recognize any reduction in required regulatory capital as a result of a securitization or other form of credit risk transfer.
Under the final rule, as under the proposal, a bank must determine the risk-weighted asset amount for a securitization exposure that is eligible for the RBA by multiplying the amount of the exposure by the appropriate risk-weight provided in the tables in section 43 of the rule. Under the proposal, whether a securitization exposure was eligible for the RBA would depend on whether the bank holding the
The proposed rule defined an external rating as a credit rating assigned by a NRSRO to an exposure, provided (i) the credit rating fully reflects the entire amount of credit risk with regard to all payments owed to the holder of the exposure, and (ii) the external rating is published in an accessible form and is included in the transition matrices made publicly available by the NRSRO that summarize the historical performance of positions it has rated. For example, if a holder is owed principal and interest on an exposure, the credit rating must fully reflect the credit risk associated with timely repayment of principal and interest. Under the proposed rule, an exposure's applicable external rating was the lowest external rating assigned to the exposure by any NRSRO.
The proposed two-rating requirement for originating banks was the only material difference between the treatment of originating banks and investing banks under the proposed securitization framework. Although the two-rating requirement is not included in the New Accord, it is generally consistent with the treatment of originating and investing banks in the general risk-based capital rules. The agencies sought comment on whether this treatment was appropriate, and on possible alternative mechanisms that could be employed to ensure the reliability of external and inferred ratings on securitization exposures retained by originating banks.
Commenters generally objected to the two-rating requirement for originating banks. Many asserted that since the credit risk of a given securitization exposure was the same regardless of the holder, the risk-based capital treatments also should be the same. Because external ratings would be publicly available, some commenters contended that NRSROs will have strong reputational reasons to give unbiased ratings—even to non-traded securitization exposures retained by originating banks. The agencies continue to believe that external ratings for securitization exposures retained by an originating bank, which typically are not traded, are subject to less market discipline than ratings for exposures sold to third parties. This disparity in market discipline warrants more stringent conditions on use of the former for risk-based capital purposes. Accordingly, the final rule retains the two-rating requirement for originating banks.
Consistent with the New Accord, the final rule states that an unrated securitization exposure has an inferred rating if another securitization exposure issued by the same issuer and secured by the same underlying exposures has an external rating and this rated reference exposure (i) is subordinate in all respects to the unrated securitization exposure; (ii) does not benefit from any credit enhancement that is not available to the unrated securitization exposure; and (iii) has an effective remaining maturity that is equal to or longer than the unrated securitization exposure. Under the RBA, securitization exposures with an inferred rating are treated the same as securitization exposures with an identical external rating. This definition does not permit a bank to assign an inferred rating based on the ratings of the underlying exposures in a securitization, even when the unrated securitization exposure is secured by a single, externally rated security. In particular, such a look-through approach would fail to meet the requirements that the rated reference exposure must be issued by the same issuer, secured by the same underlying assets, and subordinated in all respects to the unrated securitization exposure.
The agencies sought comment on whether they should consider other bases for inferring a rating for an unrated securitization position, such as using an applicable credit rating on outstanding long-term debt of the issuer or guarantor of the securitization exposure. In situations where an unrated securitization exposure benefited from a guarantee that covered all contractual payments associated with the securitization exposure, several commenters advocated allowing an inferred rating to be assigned based on the long-term rating of the guarantor. In addition, some commenters recommended that if a senior, unrated securitization exposure is secured by a single externally rated underlying security, a bank should be permitted to assign an inferred rating for the unrated exposure using a look-through approach.
The agencies do not believe there is a compelling need at this time to supplement the New Accord's methods for determining an inferred rating. However, if a need develops in the future, the agencies will seek to revise the New Accord in coordination with the BCBS and other supervisory and regulatory authorities. In the situations cited above, the framework already provides simplified methods for calculating a securitization exposure's risk-based capital requirement. For example, when a securitization exposure benefits from a full guarantee, such as from an externally rated monoline insurance company, the exposure's external rating often will reflect that guarantee. When the guaranteed securitization exposure is not externally rated, subject to the rules for recognition of guarantees of securitization exposures in section 46, the unrated securitization exposure may be treated as a direct (wholesale) exposure to the guarantor. In addition, when a securitization exposure to an ABCP program is secured by a single, externally rated asset, a look-through approach may be possible under the IAA provided that such a look-through is no less conservative than the applicable NRSRO rating methodologies.
Under the proposal, if a securitization exposure had multiple external ratings or multiple inferred ratings, a bank would be required to use the lowest rating (the rating that would produce the highest risk-based capital requirement). Commenters objected that this treatment was significantly more conservative than required by the New Accord, which permits use of the second most favorable rating, and would unfairly penalize banks in situations where the lowest rating was unsolicited or an outlier. The agencies recognize commenters’ concerns regarding unsolicited ratings, and note that the New Accord states banks should use solicited ratings. To maintain consistency with the general risk-based capital rules, the final rule defines the applicable external rating of a securitization exposure to be its lowest solicited external rating and the applicable inferred rating of a securitization exposure to be the inferred rating based on its lowest solicited external rating.
For securitization exposures eligible for the RBA, the risk-based capital requirement per dollar of securitization exposure depends on four factors: (i) The applicable rating of the exposure; (ii) whether the rating reflects a long-term or short-term assessment of the exposure's credit risk; (iii) whether the
In the proposed rule, a “senior securitization exposure” was defined as a securitization exposure that has a first priority claim on the cash flows from the underlying exposures, disregarding the claims of a service provider (such as a swap counterparty or trustee, custodian, or paying agent for the securitization) to fees from the securitization. Generally, only the most senior tranche of a securitization would be a senior securitization exposure. For example, if multiple tranches of a securitization share the transaction's highest rating, only the tranche with the shortest remaining maturity would be treated as senior, since other tranches with the same rating would not have a first claim to cash flows throughout their lifetimes. A liquidity facility that supports an ABCP program would be a senior securitization exposure if the liquidity facility provider's right to reimbursement of the drawn amounts was senior to all claims on the cash flows from the underlying exposures except claims of a service provider to fees.
In the final rule, the agencies modified this definition to clarify two points. First, in the context of an ABCP program, the final rule specifically states that both the most senior commercial paper issued by the program and a liquidity facility supporting the program may be “senior” exposures if the liquidity facility provider's right to reimbursement of any drawn amounts is senior to all claims on the cash flow from the underlying exposures. Second, the final rule clarifies that when determining whether a securitization exposure is senior, a bank is not required to consider any amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.
Consistent with the New Accord, a bank must use Table F below when a securitization exposure qualifies for the RBA based on a long-term external rating or an inferred rating based on a long-term external rating. A bank may apply the risk weights in column 1 of Table F to the securitization exposure only if the N is six or more and the securitization exposure is a senior securitization exposure. If N is six or more but the securitization exposure is not a senior securitization exposure, the bank must apply the risk weights in column 2 of Table F. Applying the principle of conservatism, however, if N is six or more a bank may use the risk weights in column 2 of Table F without determining whether the exposure is senior. A bank must apply the risk weights in column 3 of Table F to the securitization exposure if N is less than six.
In certain situations the rule provides a simplified approach for determining N. If the notional number of underlying exposures of a securitization is 25 or more or if all the underlying exposures are retail exposures, a bank may assume that N is six or more (unless the bank knows or has reason to know that N is less than six). However, if the notional number of underlying exposures of a securitization is less than 25 and one or more of the underlying exposures is a non-retail exposure, the bank must compute N as described in the SFA section below.
A few commenters wanted to determine N only at the inception of a securitization transaction, due to the burden of tracking N over time. The agencies believe that a bank must track N over time to ensure an appropriate risk-based capital requirement. The number of underlying exposures in a securitization typically changes over time as some underlying exposures are repaid or default. As the number of underlying exposures changes, the risk profile of the associated securitization exposures changes, and a bank must reflect this change in risk profile in its risk-based capital requirement.
A bank must apply the risk weights in Table G when the securitization exposure qualifies for the RBA based on a short-term external rating or an inferred rating based on a short-term external rating. A bank must apply the decision rules outlined in the previous paragraph to determine which column of Table G applies.
Within Tables G and H, risk weights increase as rating grades decline. Under column 2 of Table F, for example, the risk weights range from 12 percent for exposures with the highest investment-grade rating to 650 percent for exposures rated one category below investment grade with a negative designation. This pattern of risk weights is broadly consistent with analyses employing standard credit risk models and a range of assumptions regarding correlation effects and the types of exposures being securitized.
Under the RBA, a securitization exposure that has an investment-grade rating and has fewer than six effective underlying exposures generally receives a higher risk weight than a similarly rated securitization exposure with six or more effective underlying exposures. This treatment is intended to discourage a bank from engaging in regulatory capital arbitrage by securitizing very high-quality wholesale exposures (wholesale exposures with a low PD and LGD), obtaining external ratings on the securitization exposures issued by the securitization, and retaining essentially all the credit risk of the pool of underlying exposures.
A bank must deduct from regulatory capital any securitization exposure with an external or inferred rating lower than one category below investment grade for long-term ratings or below investment grade for short-term ratings. Although this treatment is more conservative than suggested by credit risk modeling analyses, the agencies believe that deducting such exposures from regulatory capital is appropriate in light of significant modeling uncertainties for such low-rated securitization tranches. Moreover, external ratings of these tranches are subject to less market discipline because these positions generally are retained by the bank and are not traded.
The most senior tranches of granular securitizations with long-term investment-grade external ratings receive a more favorable risk weight as compared to more subordinated tranches of the same securitizations. To be considered granular, a securitization must have an N of at least six. Consistent with the New Accord, the lowest possible risk-weight, 7 percent, applies only to senior securitization exposures receiving the highest external rating (for example, AAA) and backed by a granular asset pool.
The agencies sought comment on how well the risk weights in Tables G and H capture the most important risk factors for securitization exposures of varying degrees of seniority and granularity. A number of commenters contended that, in the interest of competitive equity, the risk weight for senior securitization exposures having the highest rating and backed by a granular asset pool should be 6 percent, the level specified in the European Union's Capital Requirements Directive (CRD). The agencies decided against making this change. There is no compelling empirical evidence to support a 6 percent risk weight for all exposures satisfying these conditions
Under the final rule, as under the proposal, a bank is permitted to compute its risk-based capital requirement for a securitization exposure to an ABCP program (such as a liquidity facility or credit enhancement) using the bank's internal assessment of the credit quality of the securitization exposure. The ABCP program may be sponsored by the bank itself or by a third party. To apply the IAA, the bank's internal assessment process and the ABCP program must meet certain qualification requirements in section 44 of the final rule, and the securitization exposure must initially be internally rated at least equivalent to investment grade. A bank that elects to use the IAA for any securitization exposure to an ABCP program must use the IAA to compute risk-based capital requirements for all securitization exposures that qualify for the IAA. Under the IAA, a bank maps its internal credit assessment of a securitization exposure to an equivalent external credit rating from an NRSRO. The bank must determine the risk-weighted asset amount for a securitization exposure by multiplying the amount of the exposure (using the methodology set forth above in the RBA section) by the appropriate risk weight provided in Table F or G above.
Under the proposal, a bank required prior written approval from its primary Federal supervisor before it could use the IAA. Several commenters objected to this requirement maintaining that approval is not required under the New Accord and would likely delay a bank being authorized to use the IAA for new ABCP programs. Instead, commenters requested a submission and non-objection approach, under which a bank would be allowed to use the IAA in the absence of any objection from its supervisor based on examination findings. The final rule retains the requirement for prior written approval before a bank can use the IAA. Like other optional approaches in the final rule (for example, the double default treatment and the internal models methodology), it is important that the primary Federal supervisor have an opportunity to review a bank's practices relative to the final rule before allowing a bank to use the optional approach. If a bank chooses to implement the IAA at the same time that it implements the advanced approaches, the IAA review and approval process will be part of the overall qualification process. If a bank chooses to implement the IAA after it has qualified for the advanced approaches, prior written approval is a necessary safeguard for ensuring appropriate application of the IAA. Furthermore, the agencies believe this requirement can be implemented without impeding future innovations in ABCP programs.
Similar to the proposed rule, under the final rule a bank must demonstrate that its internal credit assessment process satisfies all the following criteria in order to receive approval to use the IAA.
The bank's internal credit assessments of securitization exposures to ABCP programs must be based on publicly available rating criteria used by an NRSRO for evaluating the credit risk of the underlying exposures. The requirement that an NRSRO's rating criteria be publicly available does not mean that these criteria must be published formally by the NRSRO. While the agencies expect banks to rely on published rating criteria when these criteria are available, an NRSRO often delays publication of rating criteria for securitizations involving new asset types until the NRSRO builds sufficient experience with such assets. Similarly, as securitization structures evolve over time, published criteria may be revised with some lag. Especially for securitizations involving new structures or asset types, the requirement that rating criteria be publicly available should be interpreted broadly to encompass not only published criteria, but also criteria that are obtained through written correspondence or other communications with an NRSRO. In such cases, these communications should be documented and available for review by the bank's primary Federal supervisor. The agencies believe this flexibility is appropriate only for unique situations when published rating criteria are not generally applicable.
A commenter asked whether the applicable NRSRO rating criteria must cover all contractual payments owed to the bank holding the exposure, or only contractual principal and interest. For example, liquidity facilities typically obligate the seller to make certain future fee and indemnity payments directly to the liquidity bank. These ancillary obligations, however, are not an exposure to the ABCP program and would not normally be covered by NRSRO rating criteria, which focus on the risks of the underlying assets and the exposure's vulnerability to those risks. The agencies agree that such ancillary obligations of the seller need not be covered by the applicable NRSRO rating criteria for an exposure to be eligible for the IAA.
To be eligible for the IAA, a bank must also demonstrate that its internal credit assessments of securitization exposures used for regulatory capital purposes are consistent with those used in its internal risk management process, capital adequacy assessment process, and management information reporting systems. The bank must also demonstrate that its internal credit assessment process has sufficient granularity to identify gradations of risk. Each of the bank's internal credit assessment categories must correspond to an external credit rating of an NRSRO. In addition, the bank's internal credit assessment process, particularly the stress test factors for determining credit enhancement requirements, must be at least as conservative as the most conservative of the publicly available rating criteria of the NRSROs that have provided external credit ratings to the commercial paper issued by the ABCP program. In light of recent events in the securitization market, the agencies emphasize that if an NRSRO that provides an external rating to an ABCP program's commercial paper changes its methodology, the bank must evaluate whether to revise its internal assessment process.
Moreover, the bank must have an effective system of controls and oversight that ensures compliance with these operational requirements and maintains the integrity and accuracy of the internal credit assessments. The bank must also have an internal audit function independent from the ABCP program business line and internal credit assessment process that assesses at least annually whether the controls over the internal credit assessment process function as intended. The bank must review and update each internal credit assessment whenever new material information is available, but no less frequently than annually. The bank must also validate its internal credit assessment process on an ongoing basis, but not less frequently than annually.
Under the proposed rule, in order for a bank to use the IAA on a specific exposure to an ABCP program, the program had to satisfy the following requirements:
(i) All commercial paper issued by the ABCP program must have an external rating.
(ii) The ABCP program must have robust credit and investment guidelines (underwriting standards).
(iii) The ABCP program must perform a detailed credit analysis of the asset sellers' risk profiles.
(iv) The ABCP program's underwriting policy must establish minimum asset eligibility criteria that include a prohibition of the purchase of assets that are significantly past due or defaulted, as well as limitations on concentrations to an individual obligor or geographic area and the tenor of the assets to be purchased.
(v) The aggregate estimate of loss on an asset pool that the ABCP program is considering purchasing must consider all sources of potential risk, such as credit and dilution risk.
(vi) The ABCP program must incorporate structural features into each purchase of assets to mitigate potential credit deterioration of the underlying exposures. Such features may include wind-down triggers specific to a pool of underlying exposures.
Commenters suggested that the program-level eligibility criteria should apply only to those elements of the ABCP program that are relevant to the securitization exposure held by the bank in order to prevent an ABCP program's purchase of a single asset pool that does not meet the above criteria from disallowing the IAA for securitization exposures to that program that are unrelated to the non-qualifying asset pool. The agencies agree that this is a reasonable approach. Accordingly, the final rule applies criteria (ii) through (vi) to the exposures underlying a securitization exposure, rather than to the entire ABCP program. For a program-wide credit enhancement facility, all of the separate seller-specific arrangements benefiting from that facility must meet the above requirements for the facility to be eligible for the IAA.
Several commenters objected to the requirement that the ABCP program prohibit purchases of significantly past-due or defaulted assets. Commenters contended that such purchases should be allowed so long as the applicable NRSRO rating criteria permit and deal appropriately with such assets. Like the New Accord, the final rule prohibits the ABCP program from purchasing significantly past-due or defaulted assets in order to ensure that the IAA is applied only to securitization exposures that are relatively low-risk at inception. This criterion would be met if the ABCP program does not fund underlying assets that are significantly past due or defaulted when placed into the program (that is, the program's advance rate against such assets is 0 percent) and the securitization exposure is not subject to potential losses associated with these assets. The agencies observe that the rule does not set a specific number-of-days-past due criterion. In addition, the term ‘defaulted assets’ in criterion (iv) does not refer to the wholesale and retail definitions of default in the final rule, but rather may be interpreted as referring to assets that have been charged off or written down by the seller prior to being placed into the ABCP program or to assets that would be charged off or written down under the program's governing contracts.
In addition, commenters asked the agencies to clarify that a bank may ignore one or more of the eligibility requirements where the requirement is not relevant to a particular exposure. For example, in the case of a liquidity facility supporting a static pool of term loans, it may not be possible to incorporate features into the transaction that mitigate against a potential deterioration in these assets, and there may be no use for detailed credit analyses of the seller following the securitization if the seller has no further involvement with the transaction. The agencies have modified the final criterion for determining whether an exposure qualifies for the IAA, to specify that where relevant, the ABCP program must incorporate structural features into each purchase of exposures underlying the securitization exposure to mitigate potential credit deterioration of the underlying exposures.
Under the proposed rule, a bank using the SFA would determine the risk-weighted asset amount for a securitization exposure by multiplying the SFA risk-based capital requirement for the exposure (as determined by the supervisory formula set forth below) by 12.5. If the SFA risk weight for a securitization exposure was 1,250 percent or greater, however, the bank would deduct the exposure from total capital rather than risk weight the exposure. The agencies noted that deduction is consistent with the treatment of other high-risk securitization exposures, such as CEIOs.
The SFA capital requirement for a securitization exposure depends on the following seven inputs:
(i) The amount of the underlying exposures (UE);
(ii) The securitization exposure's proportion of the tranche that contains the securitization exposure (TP);
(iii) The sum of the risk-based capital requirement and ECL for the underlying exposures (as determined under the final rule as if the underlying exposures were held directly on the bank's balance sheet) divided by the amount of the underlying exposures (K
(iv) The tranche's credit enhancement level (L);
(v) The tranche's thickness (T);
(vi) The securitization's effective number of underlying exposures (N); and
(vii) The securitization's exposure-weighted average loss given default (EWALGD).
A bank may only use the SFA to determine its risk-based capital requirement for a securitization exposure if the bank can calculate each of these seven inputs on an ongoing basis. In particular, if a bank cannot compute K
The SFA capital requirement for a securitization exposure is UE multiplied by TP multiplied by the greater of (i) 0.0056 * T; or (ii) S[L+T] − S[L], where:
In these expressions, β[Y; a, b] refers to the cumulative beta distribution with parameters a and b evaluated at Y. In the case where N = 1 and EWALGD = 100 percent, S[Y] in formula (1) must be calculated with K[Y] set equal to the product of K
The agencies are modifying the SFA treatment of certain high risk securitization exposures in the final rule. Under the proposed treatment described above, a bank would have to deduct from total capital any securitization exposure with a SFA risk weight equal to 1,250 percent. Under certain circumstances, however, a slight increase in the thickness of the tranche that contains the securitization exposure (T), holding other SFA risk parameters fixed, could cause the exposure's SFA risk-weight to fall below 1,250 percent. As a result, the bank would not deduct any part of the exposure from capital and would, instead, reflect the entire amount of the SFA risk-based capital requirement in its risk-weighted assets. Consistent with the New Accord,
To illustrate, suppose that an exposure's SFA capital requirement equaled $15, and UE, TP, K
The specific securitization exposures that are subject to this deduction treatment under the SFA may change over time in response to variations in the credit quality of the underlying exposures. For example, if the pool's IRB capital requirement were to increase after the inception of a securitization, additional portions of unrated securitization exposures may fall below K
The SFA formula effectively imposes a 56 basis point minimum risk-based capital requirement (8 percent of the 7 percent risk weight) per dollar of securitization exposure. Although such a floor may impose a capital requirement that is too high for some securitization exposures, the agencies continue to believe that some minimum prudential capital requirement is appropriate in the securitization context. This 7 percent risk-weight floor is also consistent with the lowest capital requirement available under the RBA and, thus, should reduce incentives for regulatory capital arbitrage.
The SFA formula is a blend of credit risk modeling results and supervisory judgment. The function S[Y] incorporates two distinct features. The first is a pure model-based estimate of the pool's aggregate systematic or non-diversifiable credit risk that is attributable to a first loss position covering losses up to and including Y. Because the tranche of interest covers losses over a specified range (defined in terms of L and T), the tranche's systematic risk can be represented as S[L+T] − S[L]. The second feature involves a supervisory add-on primarily intended to avoid behavioral distortions associated with what would otherwise be a discontinuity in capital requirements for relatively thin mezzanine tranches lying just below and just above the K
Apart from the risk-weight floor and other supervisory adjustments described above, the supervisory formula attempts to be as consistent as possible with the parameters and assumptions of the IRB approach that would apply to the underlying exposures if held directly by a bank.
Consistent with the proposal, the final rule defines the seven inputs into the SFA formula as follows:
(i)
(ii)
(iii)
The calculation of K
In practice, a bank's ability to calculate K
To reduce the operational burden of estimating K
(iv)
Any reserve account funded by accumulated cash flows from the underlying exposures that is subordinated to the tranche that contains the bank's securitization exposure may be included in the numerator and denominator of L to the extent cash has accumulated in the account. Unfunded reserve accounts (reserve accounts that are to be funded from future cash flows from the underlying exposures) may not be included in the calculation of L.
In some cases, the purchase price of receivables will reflect a discount that provides credit enhancement (for example, first loss protection) for all or certain tranches. When this arises, L should be calculated inclusive of this discount if the discount provides credit enhancement for the securitization exposure.
(v)
(vi)
N represents the granularity of a pool of underlying exposures using an “effective” number of exposures concept rather than a “gross” number of exposures concept to appropriately assess the diversification of pools that have individual underlying exposures of different sizes. An approach that simply counts the gross number of underlying exposures in a pool treats all exposures in the pool equally. This simplifying assumption could radically overestimate the granularity of a pool with numerous small exposures and one very large exposure. The effective exposure approach captures the notion that the risk profile of such an unbalanced pool is more like a pool of several medium-sized exposures than like a pool of a large number of equally sized small exposures.
For example, suppose Pool A contains four loans with EADs of $100 each. Under the formula set forth above, N for Pool A would be four, precisely equal to the actual number of exposures. Suppose Pool B also contains four loans: One loan with an EAD of $100 and three loans with an EAD of $1. Although both pools contain four loans, Pool B is much less diverse and granular than Pool A because Pool B is dominated by the presence of a single $100 loan. Intuitively, therefore, N for Pool B should be closer to one than to four. Under the formula in the rule, N for Pool B is calculated as follows:
As noted above, when calculating N for a re-securitization, a bank must treat each underlying securitization exposure as an exposure to a single obligor. This conservative treatment addresses the concern that AVCs among securitization exposures can be much greater than the AVCs among the underlying individual assets securing these securitization exposures. Because the framework's simple approach to re-securitizations may result in the differential treatment of economically similar securitization exposures, the agencies sought comment on alternative approaches for determining the N of a re-securitization. While a number of commenters urged that a bank be permitted to calculate N for re-securitizations of asset-backed securities by looking through to the underlying pools of assets securing these securities, none provided theoretical or empirical evidence to support this recommendation. Absent such evidence, the final rule remains consistent with New Accord's measurement of N for re-securitizations.
(vii)
Although this treatment of EWALGD is consistent with the New Accord, several commenters asserted that assigning an LGD of 100 percent to all securitization exposures in the underlying pool was excessively conservative, particularly for underlying exposures that are senior, highly rated asset-backed securities. The agencies acknowledge that in many situations an LGD significantly lower than 100 percent may be appropriate. However, determination of the appropriate LGD depends on many complex factors, including the characteristics of the underlying assets and structural features of the securitization, such as the securitization exposure's thickness. Moreover, for thin securitization exposures or certain mezzanine positions backed by low-quality assets, the LGD may in fact be close to 100 percent. In this light, the agencies believe that any simple alternative to the New Accord's measurement of EWALGD would increase the potential for capital arbitrage, and any more risk-sensitive alternative would take considerable time to develop. Thus, the agencies have retained the proposed treatment, consistent with the New Accord.
Under certain conditions, a bank may employ the following simplifications to the SFA. First, for securitizations all of whose underlying exposures are retail exposures, a bank may set h=0 and v=0. In addition, if the share of a securitization corresponding to the largest underlying exposure (C
Under the proposed SFA, there was no special treatment provided for ABCP liquidity facilities that could be drawn upon only during periods of general market disruption. In contrast, the New Accord provides a more favorable capital treatment within the SFA for eligible market disruption liquidity facilities than for other liquidity facilities. Under the New Accord, an eligible market disruption liquidity facility is a liquidity facility that supports an ABCP program and that (i) is subject to an asset quality test that precludes funding of underlying exposures that are in default; (ii) can be used to fund only those exposures that have an investment-grade external rating at the time of funding, if the underlying exposures that the facility must fund against are externally rated exposures at the time that the exposures are sold to the program; and (iii) may only be drawn in the event of a general market disruption.
The agencies sought comment on the prevalence of eligible market disruption liquidity facilities that might be subject to the SFA and, by implication, whether the final rule should incorporate the treatment provided in the New Accord. Commenters responded that eligible market disruption liquidity facilities currently are not a material product line for U.S. banks, but urged international consistency in this area. To limit additional complexity in the final rule, and because U.S. banks have limited exposure to eligible market disruption liquidity facilities, the agencies are not including a separate treatment of eligible market disruption liquidity facilities in the final rule. The agencies believe that the final rule provides adequate flexibility to determine an appropriate capital requirement for market disruption liquidity facilities.
The treatment of CRM for securitization exposures differs from that applicable to wholesale and retail exposures, and is largely unchanged from the proposal. An originating bank that has obtained a credit risk mitigant to hedge its securitization exposure to a synthetic or traditional securitization that satisfies the operational criteria in section 41 of the final rule may recognize the credit risk mitigant, but only as provided in section 46 of the final rule. An investing bank that has obtained a credit risk mitigant to hedge a securitization exposure also may recognize the credit risk mitigant, but only as provided in section 46. A bank that has used the RBA or IAA to calculate its risk-based capital requirement for a securitization exposure whose external or inferred rating (or equivalent internal rating under the IAA) reflects the benefits of a particular credit risk mitigant provided to the associated securitization or that supports some or all of the underlying exposures, however, may not use the securitization credit risk mitigation rules to further reduce its risk-based capital requirement for the exposure based on that credit risk mitigant. For example, a bank that owns a AAA-rated asset-backed security that benefits from an insurance wrap that is part of the securitization transaction must calculate its risk-based capital requirement for the security strictly under the RBA. No additional credit is given for the presence of the insurance wrap. On the other hand, if a bank owns a BBB-rated asset-backed security and obtains a credit default swap from a AAA-rated counterparty to protect the bank from losses on the security, the bank would be able to apply the securitization CRM rules to recognize the risk mitigating effects of the credit default swap and determine the risk-based capital requirement for the position.
As under the proposal, the final rule contains a treatment of CRM for securitization exposures separate from the treatment for wholesale and retail exposures because the wholesale and retail exposure CRM approaches rely on substitutions of, or adjustments to, the risk parameters of the hedged exposure. Because the securitization framework does not rely on risk parameters to determine risk-based capital requirements for securitization exposures, a different treatment of CRM for securitization exposures is necessary.
The securitization CRM rules, like the wholesale and retail CRM rules, address collateral separately from guarantees and credit derivatives. A bank is not permitted to recognize collateral other than financial collateral as a credit risk mitigant for securitization exposures. A bank may recognize financial collateral in determining the bank's risk-based capital requirement for a securitization exposure that is not a repo-style transaction, an eligible margin loan, or an OTC derivative for which the bank has reflected collateral in its determination of exposure amount under section 32 of the rule by using a collateral haircut approach. The bank's risk-based capital requirement for a collateralized securitization exposure is equal to the risk-based capital requirement for the securitization exposure as calculated under the RBA or the SFA multiplied by the ratio of adjusted exposure amount (SE*) to original exposure amount (SE),
With the prior written approval of its primary Federal supervisor, a bank may calculate haircuts using its own internal estimates of market price volatility and foreign exchange volatility, subject to the requirements for use of own-estimates haircuts contained in section 32 of the rule. Banks that use own-estimates haircuts for collateralized securitization exposures must assume a minimum holding period (T
A bank that does not qualify for and use own-estimates haircuts must use the collateral type haircuts (Hs) in Table 3 of the final rule and must use a currency mismatch haircut (Hfx) of 8 percent if the exposure and the collateral are denominated in different currencies. To
A bank may only recognize an eligible guarantee or eligible credit derivative provided by an eligible securitization guarantor in determining the bank's risk-based capital requirement for a securitization exposure. The definitions of eligible guarantee and eligible credit derivative apply to both the wholesale and retail frameworks and the securitization framework. An eligible securitization guarantor is defined to mean (i) 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, a depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)), a bank holding company (as defined in section 2 of the Bank Holding Company Act (12 U.S.C. 1841)), a savings and loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of the holding company's activities are permissible for a financial holding company under 12 U.S.C. 1843(k)), a foreign bank (as defined in section 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a securities firm; (ii) any other entity (other than a securitization SPE) that has issued and outstanding an unsecured long-term debt security without credit enhancement that has a long-term applicable external rating in one of the three highest investment-grade rating categories; or (iii) any other entity (other than a securitization SPE) that has a PD assigned by the bank that is lower than or equivalent to the PD associated with a long-term external rating in the third-highest investment-grade rating category.
A bank must use the following procedures if the bank chooses to recognize an eligible guarantee or eligible credit derivative provided by an eligible securitization guarantor in determining the bank's risk-based capital requirement for a securitization exposure. If the protection amount of the eligible guarantee or eligible credit derivative equals or exceeds the amount of the securitization exposure, the bank must set the risk-weighted asset amount for the securitization exposure equal to the risk-weighted asset amount for a direct exposure to the eligible securitization guarantor (as determined in the wholesale risk weight function described in section 31 of the final rule), using the bank's PD for the guarantor, the bank's LGD for the guarantee or credit derivative, and an EAD equal to the amount of the securitization exposure (as determined in section 42(e) of the final rule).
If the protection amount of the eligible guarantee or eligible credit derivative is less than the amount of the securitization exposure, the bank must divide the securitization exposure into two exposures in order to recognize the guarantee or credit derivative. The risk-weighted asset amount for the securitization exposure is equal to the sum of the risk-weighted asset amount for the covered portion and the risk-weighted asset amount for the uncovered portion. The risk-weighted asset amount for the covered portion is equal to the risk-weighted asset amount for a direct exposure to the eligible securitization guarantor (as determined in the wholesale risk weight function described in section 31 of the rule), using the bank's PD for the guarantor, the bank's LGD for the guarantee or credit derivative, and an EAD equal to the protection amount of the credit risk mitigant. The risk-weighted asset amount for the uncovered portion is equal to the product of (i) 1.0 minus the ratio of the protection amount of the eligible guarantee or eligible credit derivative divided by the amount of the securitization exposure; and (ii) the risk-weighted asset amount for the securitization exposure without the credit risk mitigant (as determined in sections 42-45 of the final rule).
For any hedged securitization exposure, the bank must make applicable adjustments to the protection amount as required by the maturity mismatch, currency mismatch, and lack of restructuring provisions in paragraphs (d), (e), and (f) of section 33 of the final rule. The agencies have clarified in the final rule that the mismatch provisions apply to any hedged securitization exposure and any more senior securitization exposure that benefits from the hedge. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the bank must use the longest residual maturity of any of the hedged exposures as the residual maturity of all the hedged exposures. If the risk-weighted asset amount for a guaranteed securitization exposure is greater than the risk-weighted asset amount for the securitization exposure without the guarantee or credit derivative, a bank may elect not to recognize the guarantee or credit derivative.
When a bank recognizes an eligible guarantee or eligible credit derivative provided by an eligible securitization guarantor in determining the bank's risk-based capital requirement for a securitization exposure, the bank also must (i) calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure (that is, the PD associated with the guarantor's rating grade, the LGD of the guarantee, and an EAD equal to the protection amount of the credit risk mitigant); and (ii) add this ECL to the bank's total ECL.
In a synthetic securitization, an originating bank uses credit derivatives or guarantees to transfer the credit risk, in whole or in part, of one or more underlying exposures to third-party protection providers. The credit derivative or guarantee may be either collateralized or uncollateralized. In the typical synthetic securitization, the underlying exposures remain on the balance sheet of the originating bank, but a portion of the originating bank's credit exposure is transferred to the protection provider or covered by collateral pledged by the protection provider.
In general, the final rule's treatment of synthetic securitizations is identical to that of traditional securitizations and to that described in the proposal. The operational requirements for synthetic securitizations are more detailed than those for traditional securitizations and are intended to ensure that the originating bank has truly transferred credit risk of the underlying exposures to one or more third-party protection providers.
Although synthetic securitizations typically employ credit derivatives, which might suggest that such transactions would be subject to the CRM rules in section 33 of the final rule, banks must apply the securitization framework when calculating risk-based capital requirements for a synthetic
For synthetic securitizations, an originating bank may recognize for risk-based capital purposes the use of CRM to hedge, or transfer credit risk associated with, underlying exposures only if each of the following conditions is satisfied:
(i) The credit risk mitigant is financial collateral, an eligible credit derivative from an eligible securitization guarantor (defined above), or an eligible guarantee from an eligible securitization guarantor.
(ii) The bank transfers credit risk associated with the underlying exposures to third-party investors, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(A) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(B) Require the bank to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
(C) Increase the bank's cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(D) Increase the yield payable to parties other than the bank in response to a deterioration in the credit quality of the underlying exposures; or
(E) Provide for increases in a retained first loss position or credit enhancement provided by the bank after the inception of the securitization.
(iii) The bank obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions.
(iv) Any clean-up calls relating to the securitization are eligible clean-up calls (as discussed above).
Failure to meet the above operational requirements for a synthetic securitization prevents the originating bank from using the securitization framework and requires the originating bank to hold risk-based capital against the underlying exposures as if they had not been synthetically securitized. A bank that provides credit protection to a synthetic securitization must use the securitization framework to compute risk-based capital requirements for its exposures to the synthetic securitization even if the originating bank failed to meet one or more of the operational requirements for a synthetic securitization.
Consistent with the treatment of traditional securitization exposures, a bank must use the RBA for synthetic securitization exposures that have an appropriate number of external or inferred ratings. For an originating bank, the RBA will typically be used only for the most senior tranche of the securitization, which often has an inferred rating. If a bank has a synthetic securitization exposure that does not have an external or inferred rating, the bank must apply the SFA to the exposure (if the bank and the exposure qualify for use of the SFA) without considering any CRM obtained as part of the synthetic securitization. Then, if the bank has obtained a credit risk mitigant on the exposure as part of the synthetic securitization, the bank may apply the securitization CRM rules to reduce its risk-based capital requirement for the exposure. For example, if the credit risk mitigant is financial collateral, the bank may use the standard supervisory or own-estimates haircuts to reduce its risk-based capital requirement. If the bank is a protection provider to a synthetic securitization and has obtained a credit risk mitigant on its exposure, the bank may also apply the securitization CRM rules in section 46 of the final rule to reduce its risk-based capital requirement on the exposure. If neither the RBA nor the SFA is available, a bank must deduct the exposure from regulatory capital.
If a bank has a first-loss position in a pool of underlying exposures in connection with a synthetic securitization, the bank must deduct the position from regulatory capital unless (i) the position qualifies for use of the RBA or (ii) the bank and the position qualify for use of the SFA and K
In a typical synthetic securitization, an originating bank obtains credit protection on a mezzanine, or second-loss, tranche of a synthetic securitization by either (i) obtaining a credit default swap or financial guarantee from a third-party financial institution; or (ii) obtaining a credit default swap or financial guarantee from an SPE whose obligations are secured by financial collateral.
For a bank that creates a synthetic mezzanine tranche by obtaining an eligible credit derivative or guarantee from an eligible securitization guarantor, the bank generally will treat the notional amount of the credit derivative or guarantee (as adjusted to reflect any maturity mismatch, lack of restructuring coverage, or currency mismatch) as a wholesale exposure to the protection provider and use the IRB approach for wholesale exposures to determine the bank's risk-based capital requirement for the exposure. A bank that creates the synthetic mezzanine tranche by obtaining from a non-eligible securitization guarantor a guarantee or credit derivative that is collateralized by financial collateral generally will (i) first use the SFA to calculate the risk-based capital requirement on the exposure (ignoring the guarantee or credit derivative and the associated collateral); and (ii) then use the securitization CRM rules to calculate any reductions to the risk-based capital requirement resulting from the associated collateral. The bank may look only to the protection provider from which it obtains the guarantee or credit derivative when determining its risk-based capital requirement for the exposure (that is, if the protection provider hedges the guarantee or credit derivative with a guarantee or credit derivative from a third party, the bank may not look through the protection provider to that third party when calculating its risk-based capital requirement for the exposure).
For a bank providing credit protection on a mezzanine tranche of a synthetic securitization, the bank must use the RBA to determine the risk-based capital requirement for the exposure if the exposure has an external or inferred rating. If the exposure does not have an external or inferred rating and the exposure qualifies for use of the SFA, the bank may use the SFA to calculate the risk-based capital requirement for the exposure. If neither the RBA nor the SFA are available, the bank must deduct the exposure from regulatory capital. If a bank providing credit protection on the mezzanine tranche of a synthetic securitization obtains a credit risk mitigant to hedge its exposure, the bank may apply the securitization CRM rules to reflect the risk reduction achieved by the credit risk mitigant.
A bank that has the most senior position in a pool of underlying exposures in connection with a synthetic securitization must use the RBA to calculate its risk-based capital requirement for the exposure if the exposure has at least one external or inferred rating (in the case of an investing bank) or at least two external or inferred ratings (in the case of an
Credit derivatives that provide credit protection only for the n
A bank that provides credit protection on a group of underlying exposures through a first-to-default credit derivative must determine its risk-weighted asset amount for the derivative by applying the RBA (if the derivative qualifies for the RBA) or, if the derivative does not qualify for the RBA, by setting its risk-weighted asset amount for the derivative equal to the product of (i) the protection amount of the derivative; (ii) 12.5; and (iii) the sum of the risk-based capital requirements of the individual underlying exposures, up to a maximum of 100 percent. If a bank provides credit protection on a group of underlying exposures through an n
For example, a bank provides credit protection in the form of a second-to-default credit derivative on a basket of five reference exposures. The derivative is unrated and the protection amount of the derivative is $100. The risk-based capital requirements of the underlying exposures are 2.5 percent, 5.0 percent, 10.0 percent, 15.0 percent, and 20 percent. The risk-weighted asset amount of the derivative would be $100 × 12.5 × (.05 + .10 + .15 + .20) or $625. If the derivative were externally rated in the lowest investment-grade rating category with a positive designation, the risk-weighted asset amount would be $100 × 0.50 or $50.
Many securitizations of revolving credit facilities (for example, credit card receivables) contain provisions that require the securitization to be wound down and investors to be repaid if the excess spread falls below a certain threshold.
Consistent with the proposed rule, the final rule defines an early amortization provision as a provision in a securitization's governing documentation that, when triggered, causes investors in the securitization exposures to be repaid before the original stated maturity of the securitization exposure, unless the provision is solely triggered by events not related to the performance of the underlying exposures or the originating bank (such as material changes in tax laws or regulations).
Under the proposed rule, a bank would not be required to hold regulatory capital against the investors' interest if early amortization is solely triggered by events not related to the performance of the underlying exposures or the originating bank, such as material changes in tax laws or regulation. Under the New Accord, a bank is also not required to hold regulatory capital against the investors' interest if (i) the securitization has a replenishment structure in which the individual underlying exposures do not revolve and the early amortization ends the ability of the originating bank to add new underlying exposures to the securitization; (ii) the securitization involves revolving assets and contains early amortization features that mimic term structures; or (iii) investors in the securitization remain fully exposed to future draws by borrowers on the underlying exposures even after the occurrence of early amortization. The agencies sought comment on the appropriateness of these additional exemptions in the U.S. markets for revolving securitizations. Most commenters asserted that the exemptions provided in the New Accord are prudent and should be adopted by the agencies in order to avoid placing U.S. banking organizations at a competitive disadvantage relative to foreign competitors. The agencies generally agree with this view of exemption (iii), above, and the definition of early amortization provision in the final rule incorporates this exemption. The
Under the final rule, as under the proposed rule, an originating bank must generally hold risk-based capital against the sum of the originating bank's interest and the investors' interest arising from a securitization that contains an early amortization provision. An originating bank must compute its capital requirement for its interest using the hierarchy of approaches for securitization exposures as described above. The originating bank's risk-weighted asset amount for the investors' interest in the securitization is equal to the product of the following five quantities: (i) The EAD associated with the investors' interest; (ii) the appropriate CF as determined below; (iii) K
Under the final rule, consistent with the proposal, the investors' interest with respect to a revolving securitization captures both the drawn balances and undrawn lines of the underlying exposures that are allocated to the investors in the securitization. The EAD associated with the investors' interest is equal to the EAD of the underlying exposures multiplied by the ratio of:
(i) The total amount of securitization exposures issued by the securitization SPE to investors; divided by
(ii) The outstanding principal amount of underlying exposures.
In general, the applicable CF depends on whether the early amortization provision repays investors through a controlled or non-controlled mechanism and whether the underlying exposures are revolving retail credit facilities that are uncommitted (unconditionally cancelable by the bank to the fullest extent of Federal law, such as credit card receivables) or are other revolving credit facilities (for example, revolving corporate credit facilities). Consistent with the New Accord, under the proposed rule a controlled early amortization provision would meet each of the following conditions:
(i) The originating bank has appropriate policies and procedures to ensure that it has sufficient capital and liquidity available in the event of an early amortization;
(ii) Throughout the duration of the securitization (including the early amortization period) there is the same pro rata sharing of interest, principal, expenses, losses, fees, recoveries, and other cash flows from the underlying exposures, based on the originating bank's and the investors' relative shares of the underlying exposures outstanding measured on a consistent monthly basis;
(iii) The amortization period is sufficient for at least 90 percent of the total underlying exposures outstanding at the beginning of the early amortization period to have been repaid or recognized as in default; and
(iv) The schedule for repayment of investor principal is not more rapid than would be allowed by straight-line amortization over an 18-month period.
An early amortization provision that does not meet any of the above criteria is a non-controlled early amortization provision.
The agencies solicited comment on the distinction between controlled and non-controlled early amortization provisions and on the extent to which banks use controlled early amortization provisions. The agencies also invited comment on the proposed definition of a controlled early amortization provision, including in particular the 18-month period set forth above. Commenters generally believed that very few, if any, revolving securitizations would meet the criteria needed to qualify for treatment as a controlled early amortization structure. One commenter maintained that a fixed 18-month straight-line amortization period was too long for certain exposures, such as prime credit cards.
The final rule is unchanged from the proposal with respect to controlled and non-controlled early amortization provisions. The agencies believe that the proposed eligibility criteria for a controlled early amortization are important indicators of the risks to which an originating bank would be exposed in the event of any early amortization. While a fixed 18-month straight-line amortization period is unlikely to be the most appropriate period in all cases, it is a reasonable period for the vast majority of cases. The lower operational burden of using a single, fixed amortization period warrants the potential diminution in risk-sensitivity.
Under the proposed rule, to calculate the appropriate CF for a securitization of uncommitted revolving retail exposures that contains a
A bank would apply a 90 percent CF for all other revolving underlying exposures (committed exposures and nonretail exposures) in securitizations containing a controlled early amortization provision. The proposed CFs for uncommitted revolving retail credit lines were much lower than for committed retail credit lines or for non-retail credit lines because of the demonstrated ability of banks to monitor and, when appropriate, to curtail promptly uncommitted retail credit lines for customers of deteriorating credit quality. Such account management tools are unavailable for committed lines, and banks may be less proactive about using such tools in the case of uncommitted non-retail credit lines owing to lender liability concerns and the prominence of broad-based, longer-term customer relationships.
Under the proposed rule, to calculate the appropriate CF for securitizations of uncommitted revolving retail exposures that contain a
A bank would use a 100 percent CF for all other revolving underlying exposures (committed exposures and nonretail exposures) in securitizations containing a
A few commenters asserted that the proposed CFs were too high. The agencies believe, however, that the proposed CFs appropriately capture the risk to the bank of a potential early amortization event. The agencies also believe that the proposed CFs, which are consistent with the New Accord, foster consistency across national jurisdictions. Therefore, the agencies are maintaining the proposed CFs in the final rule with one exception, discussed below.
In circumstances where a securitization contains a mix of retail and nonretail exposures or a mix of committed and uncommitted exposures, a bank may take a pro rata approach to determining the CF for the securitization's early amortization provision. If a pro rata approach is not feasible, a bank must treat the securitization as a securitization of nonretail exposures if a single underlying exposure is a nonretail exposure and must treat the securitization as a securitization of committed exposures if a single underlying exposure is a committed exposure.
The agencies sought comment on the appropriateness of the proposed 4.5 percent excess spread trapping point and on whether there were other types and levels of early amortization triggers used in securitizations of revolving retail exposures that should be addressed by the agencies. Although some commenters believed the 4.5 percent trapping point assumption was reasonable, others believed that it was inappropriate for securitizations of HELOCs. Unlike credit card securitizations, U.S. HELOC securitizations typically do not generate material excess spread and typically are structured with credit enhancements and early amortization triggers based on other factors, such as portfolio loss rates. Under the proposed treatment, banks would be required to hold capital against the potential early amortization of most U.S. HELOC securitizations at their inception, rather than only if the credit quality of the underlying exposures deteriorated. Although the New Accord does not provide an alternative methodology, the agencies concluded that the features of the U.S. HELOC securitization market warrant an alternative approach. Accordingly, the final rule allows a bank the option of applying either (i) the CFs in Tables I and J, as appropriate, or (ii) a fixed CF equal to 10 percent to its securitizations for which all or substantially all of the underlying exposures are revolving residential mortgage exposures. If a bank chooses the fixed CF of 10 percent, it must use that CF for all securitizations for which all or substantially all of the underlying exposures are revolving residential mortgage exposures. The agencies will monitor the implementation of this alternative approach to ensure that it is consistent with safety and soundness.
This section describes the final rule's risk-based capital treatment for equity exposures. Consistent with the proposal, under the final rule, a bank has the option to use either a simple risk-weight approach (SRWA) or an internal models approach (IMA) for equity exposures that are not exposures to an investment fund. A bank must use a look-through approach for equity exposures to an investment fund.
Although the New Accord provides national supervisors the option to provide a grandfathering period for equity exposures—whereby for a maximum of ten years, supervisors could permit banks to exempt from the IRB treatment equity investments held at the time of the publication of the New Accord—the proposed rule did not include such a grandfathering provision. A number of commenters asserted that the proposal was inconsistent with the New Accord and would subject banks using the agencies’ advanced approaches to significant competitive inequity.
The agencies continue to believe that it is not appropriate or necessary to incorporate the New Accord's optional ten-year grandfathering period for equity exposures. The grandfathering concept would reduce the risk
Under the proposed SRWA, a bank generally would assign a 300 percent risk weight to publicly traded equity exposures and a 400 percent risk weight to non-publicly traded equity exposures. Certain equity exposures to sovereigns, multilateral institutions, and public sector enterprises would have a risk weight of 0 percent, 20 percent, or 100 percent; and certain community development equity exposures, hedged equity exposures, and, up to certain limits, non-significant equity exposures would receive a 100 percent risk weight.
Alternatively, under the proposed rule, a bank that met certain minimum quantitative and qualitative requirements on an ongoing basis and obtained the prior written approval of its primary Federal supervisor could use the IMA to determine its risk-based capital requirement for all modeled equity exposures. A bank that qualified to use the IMA could apply the IMA to its publicly traded and non-publicly traded equity exposures, or could apply the IMA only to its publicly traded equity exposures. However, if the bank applied the IMA to its publicly traded equity exposures, it would be required to apply the IMA to all such exposures. Similarly, if a bank applied the IMA to both publicly traded and non-publicly traded equity exposures, it would be required to apply the IMA to all such exposures. If a bank did not qualify to use the IMA, or elected not to use the IMA, to compute its risk-based capital requirements for equity exposures, the bank would apply the SRWA to assign risk weights to its equity exposures.
Several commenters objected to the proposed restrictions on the use of the IMA. Commenters asserted that banks should be able to apply the SRWA and the IMA for different portfolios or subsets of equity exposures, provided that banks’ choices are consistent with internal risk management practices.
The agencies have not relaxed the proposed restrictions regarding use of the SRWA and IMA. The agencies remain concerned that if banks are permitted to employ either the SRWA or IMA to different equity portfolios, banks could choose one approach over the other to manipulate their risk-based capital requirements and not for risk management purposes. In addition, because of concerns about lack of transparency, it is not prudent to allow a bank to apply the IMA only to its non-publicly traded equity exposures and not its publicly traded equity exposures.
The proposed rule defined publicly traded to mean traded on (i) any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) or (ii) any non-U.S.-based securities exchange that is registered with, or approved by, a national securities regulatory authority and that provides a liquid, two-way market for the exposure (that is, there are enough independent bona fide offers to buy and sell so that a sales price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined promptly and a trade can be settled at such a price within five business days).
Several commenters explicitly supported the proposed definition of publicly traded, noting that it is reasonable and consistent with industry practice. Other commenters requested that the agencies revise the proposed definition by eliminating the requirement that a non-U.S.-based securities exchange provide a liquid, two-way market for the exposure. Commenters asserted that this requirement goes beyond the definition in the New Accord, which defines a publicly traded equity exposure as any equity security traded on a recognized security exchange. They asserted that registration with or approval by the national securities regulatory authority should suffice, as registration or approval generally would be predicated on the existence of a two-way market.
The agencies have retained the definition of publicly traded as proposed. The agencies believe that the liquid, two-way market requirement is not in addition to the requirements of the New Accord. Rather, this requirement clarifies the intent of “traded” in the New Accord and helps to ensure that a sales price reasonably related to the last sales price or competitive bid and offer quotations can be determined promptly and settled within five business days.
A bank using either the IMA or the SRWA must determine the adjusted carrying value for each equity exposure. The proposed rule defined the adjusted carrying value of an equity exposure as:
(i) For the on-balance sheet component of an equity exposure, the bank's carrying value of the exposure reduced by any unrealized gains on the exposure that are reflected in such carrying value but excluded from the bank's tier 1 and tier 2 capital;
(ii) For the off-balance sheet component of an equity exposure, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) for a given small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in (i).
Commenters generally supported the proposed definition of adjusted carrying value and the agencies are adopting the definition as proposed with one minor clarification regarding unfunded equity commitments (discussed below).
The agencies created the definition of the effective notional principal amount of the off-balance sheet portion of an equity exposure to provide a uniform method for banks to measure the on-balance sheet equivalent of an off-balance sheet exposure. For example, if the value of a derivative contract referencing the common stock of company X changes the same amount as the value of 150 shares of common stock of company X, for a small (for example, 1 percent) change in the value of the common stock of company X, the effective notional principal amount of the derivative contract is the current value of 150 shares of common stock of company X regardless of the number of shares the derivative contract references. The adjusted carrying value of the off-balance sheet component of the derivative is the current value of 150 shares of common stock of company X minus the adjusted carrying value of any on-balance sheet amount associated with the derivative.
The final rule clarifies the determination of the effective notional principal amount of unfunded equity commitments. Under the final rule, for an unfunded equity commitment that is unconditional, a bank must use the notional amount of the commitment. If the unfunded equity commitment is conditional, the bank must use its best estimate of the amount that would be funded during economic downturn conditions.
The agencies proposed specific rules for recognizing hedged equity exposures; they received no substantive comment on these rules and are adopting these rules as proposed. For purposes of determining risk-weighted assets under both the SRWA and the IMA, a bank may identify hedge pairs, which the final rule defines as two equity exposures that form an effective hedge provided each equity exposure is publicly traded or has a return that is primarily based on a publicly traded equity exposure. A bank may risk weight only the effective and ineffective portions of a hedge pair rather than the entire adjusted carrying value of each exposure that makes up the pair. Two equity exposures form an effective hedge if the exposures either have the same remaining maturity or each has a remaining maturity of at least three months; the hedge relationship is documented formally before the bank acquires at least one of the equity exposures; the documentation specifies the measure of effectiveness (E) (defined below) the bank will use for the hedge relationship throughout the life of the transaction; and the hedge relationship has an E greater than or equal to 0.8. A bank must measure E at least quarterly and must use one of three alternative measures of E—the dollar-offset method, the variability-reduction method, or the regression method.
It is possible that only part of a bank's exposure to a particular equity instrument is part of a hedge pair. For example, assume a bank has an equity exposure A with a $300 adjusted carrying value and chooses to hedge a portion of that exposure with an equity exposure B with an adjusted carrying value of $100. Also assume that the combination of equity exposure B and $100 of the adjusted carrying value of equity exposure A form an effective hedge with an E of 0.8. In this situation the bank would treat $100 of equity exposure A and $100 of equity exposure B as a hedge pair, and the remaining $200 of its equity exposure A as a separate, stand-alone equity position.
The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming the hedge pair, and the ineffective portion is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming the hedge pair. In the above example, the effective portion of the hedge pair would be 0.8 × $100 = $80 and the ineffective portion of the hedge pair would be (1−0.8) × $100 = $20.
Under the dollar-offset method of measuring effectiveness, the bank must determine the ratio of the cumulative sum of the periodic changes in the value of one equity exposure to the cumulative sum of the periodic changes in the value of the other equity exposure, termed the ratio of value change (RVC). If the changes in the values of the two exposures perfectly offset each other, the RVC will be −1. If RVC is positive, implying that the values of the two equity exposures move in the same direction, the hedge is not effective and E = 0. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
The variability-reduction method of measuring effectiveness compares changes in the value of the combined position of the two equity exposures in the hedge pair (labeled X) to changes in the value of one exposure as though that one exposure were not hedged (labeled A). This measure of E expresses the time-series variability in X as a proportion of the variability of A. As the variability described by the numerator becomes small relative to the variability described by the denominator, the measure of effectiveness improves, but is bounded from above by a value of one. E is computed as:
The value of t will range from zero to T, where T is the length of the observation period for the values of A and B, and is comprised of shorter values each labeled t.
The regression method of measuring effectiveness is based on a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in the hedge pair is the independent variable. E equals the coefficient of determination of this regression, which is the proportion of the variation in the dependent variable explained by variation in the independent variable. However, if the estimated regression coefficient is positive, then the value of E is zero. The closer the relationship between the values of the two exposures, the higher E will be.
Under the SRWA in section 52 of the proposed rule, a bank would determine the risk-weighted asset amount for each equity exposure, other than an equity exposure to an investment fund, by multiplying the adjusted carrying value of the equity exposure, or the effective portion and ineffective portion of a hedge pair as described above, by the lowest applicable risk weight in Table J. A bank would determine the risk-weighted asset amount for an equity exposure to an investment fund under section 54 of the proposed rule.
If a bank exclusively uses the SRWA for its equity exposures, the bank's aggregate risk-weighted asset amount for its equity exposures (other than equity exposures to investment funds) would be equal to the sum of the risk-weighted asset amounts for each of the bank's individual equity exposures.
Several commenters addressed the proposed risk weights under the SRWA. A few commenters asserted that the 100 percent risk weight for the effective portion of a hedge pair is too high. These commenters suggested that the risk weight for such exposures should be zero or no more than 7 percent because the effectively hedged portion of a hedge pair involves negligible credit risk. One commenter remarked that it does not believe there is an economic basis for the different risk weight for an equity exposure to a Federal Home Loan Bank depending on whether the equity exposure is held as a condition of membership.
The agencies do not agree with commenters' assertion that the effective portion of a hedge pair entails negligible credit risk. The agencies believe the 100 percent risk weight under the proposal is an appropriate and prudential safeguard; thus, it is maintained in the final rule. Banks that seek to more accurately account for equity hedging in their risk-based capital requirements should use the IMA.
The agencies agree that different risk weights for an equity exposure to a Federal Home Loan Bank or Farmer Mac depending on whether the equity exposure is held as a condition of membership do not have an economic justification, given the similar risk profile of the exposures. Accordingly, under the final rule SRWA, all equity exposures to a Federal Home Loan Bank or to Farmer Mac receive a 20 percent risk weight.
Under the SRWA, a bank may apply a 100 percent risk weight to non-significant equity exposures. The proposed rule defined non-significant equity exposures as equity exposures to the extent that the aggregate adjusted carrying value of the exposures did not exceed 10 percent of the bank's tier 1 capital plus tier 2 capital.
Several commenters objected to the 10 percent materiality threshold for determining significance. They asserted that this standard is more conservative than the 15 percent threshold under the OCC, FDIC, and Board general risk-based capital rules for nonfinancial equity investments.
The agencies note that the applicable general risk-based capital rules address only nonfinancial equity investments; that the 15 percent threshold is a percentage only of tier 1 capital; and that the 15 percent threshold was designed for that particular rule. The proposed materiality threshold of 10 percent of tier 1 plus tier 2 capital is consistent with the New Accord and is intended to identify non-significant holdings of equity exposures under a different type of capital framework. Thus, the two threshold limits are not directly comparable. The agencies believe that the proposed 10 percent threshold for determining non-significant equity exposures is appropriate for the advanced approaches and, thus, are adopting it as proposed.
As discussed above in preamble section V.A.3., the agencies have discretion under the final rule to exclude from the definition of a traditional securitization those investment firms that exercise substantially unfettered control over the size and composition of their assets, liabilities, and off-balance sheet exposures. Equity exposures to investment firms that would otherwise be a traditional securitization were it not for the specific agency exclusion are leveraged exposures to the underlying financial assets of the investment firm. The agencies believe that equity exposure to such firms with greater than immaterial leverage warrant a 600 percent risk weight under the SRWA, due to their particularly high risk. Moreover, the agencies believe that the 100 percent risk weight assigned to non-significant equity exposures is inappropriate for equity exposures to investment firms with greater than immaterial leverage.
Under the final rule, to compute the aggregate adjusted carrying value of a bank's equity exposures for determining non-significance, the bank may exclude (i) equity exposures that receive less than a 300 percent risk weight under the SRWA (other than equity exposures determined to be non-significant); (ii) the equity exposure in a hedge pair with the smaller adjusted carrying value; and (iii) a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that qualify as community development equity exposures. If a bank does not know the actual holdings of the investment fund, the bank may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the bank must assume that the investment fund invests to the maximum extent possible in equity exposures.
When determining which of a bank's equity exposures qualify for a 100 percent risk weight based on non-significance, a bank first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682), then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
The SRWA is summarized in Table K:
The IMA is designed to provide banks with a more sophisticated and risk-sensitive mechanism for calculating risk-based capital requirements for equity exposures. To qualify to use the IMA, a bank must receive prior written approval from its primary Federal supervisor. To receive such approval, the bank must demonstrate to its primary Federal supervisor's satisfaction that the bank meets the quantitative and qualitative criteria discussed below. As noted earlier, a bank may model both publicly traded and non-publicly traded equity exposures or model only publicly traded equity exposures.
In the final rule, the agencies clarify that under the IMA, a bank may use more than one model, as appropriate for its equity exposures, provided that it has received supervisory approval for use of the IMA, and each model meets the qualitative and quantitative criteria specified below and in section 53 of the rule.
The bank must have one or more models that (i) assess the potential decline in value of its modeled equity exposures; (ii) are commensurate with the size, complexity, and composition of the bank's modeled equity exposures; and (iii) adequately capture both general market risk and idiosyncratic risks. The bank's models must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99.0 percent one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the bank's modeled equity exposures using a long-term sample period. Banks with equity portfolios containing equity exposures with values that are highly nonlinear in nature (for example, equity derivatives or convertibles) must employ an internal model designed to appropriately capture the risks associated with these instruments.
In addition, the number of risk factors and exposures in the sample and the data period used for quantification in the bank's models and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the bank's estimates. The bank's model and benchmarking exercise also must incorporate data that are relevant in representing the risk profile of the bank's modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the bank's modeled equity exposures. In addition, for the reasons described below, the final rule adds that the bank's benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the bank's model uses a scenario methodology, the bank must demonstrate that the model produces a conservative estimate of potential losses on the bank's modeled equity exposures over a relevant long-term market cycle. If the bank employs risk factor models, the bank must demonstrate through empirical analysis the appropriateness of the risk factors used.
Under the proposed rule, the agencies also required that daily market prices be available for all modeled equity exposures. The proposed requirement applied to either direct holdings or proxies. Several commenters objected to the requirement of daily market prices. A few asserted that proxies for private equity investments are more relevant than public market proxies and should be permitted even if they are only available on a monthly basis. The agencies agree with commenters on this issue. Accordingly, under the final rule, banks are not required to have daily market prices for all modeled equity exposures, either direct holdings or proxies. However, to ensure sufficient rigor in the modeling process, the final rule requires that a bank's benchmarking exercise be based on daily market prices for the benchmark portfolio, as noted above.
Finally, the bank must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the bank's modeled equity exposures, and that the bank has made appropriate adjustments for differences. The bank must derive any proxies for its modeled equity exposures or benchmark portfolio using historical market data that are relevant to the bank's modeled equity exposures or benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the bank's modeled equity exposures.
In evaluating whether a bank has met the criteria described above, the bank's primary Federal supervisor may consider, among other factors, (i) the nature of the bank's equity exposures, including the number and types of equity exposures (for example, publicly traded, non-publicly traded, long, short); (ii) the risk characteristics and makeup of the bank's equity exposures, including the extent to which publicly available price information is obtainable on the exposures; and (iii) the level and degree of concentration of, and
The agencies do not intend to dictate the form or operational details of a bank's internal model for equity exposures. Accordingly, the agencies are not prescribing any particular type of model for determining risk-based capital requirements. Although the final rule requires a bank that uses the IMA to ensure that its internal model produces an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99.0 percent one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures, the rule does not require a bank to use a VaR-based model. The agencies recognize that the type and sophistication of internal models will vary across banks due to differences in the nature, scope, and complexity of business lines in general and equity exposures in particular. The agencies also recognize that some banks employ models for internal risk management and capital allocation purposes that can be more relevant to the bank's equity exposures than some VaR models. For example, some banks employ rigorous historical scenario analysis and other techniques for assessing the risk of their equity portfolios.
Banks that choose to use a VaR-based internal model under the IMA should use a historical observation period that includes a sufficient amount of data points to ensure statistically reliable and robust loss estimates relevant to the long-term risk profile of the bank's specific holdings. The data used to represent return distributions should reflect the longest sample period for which data are available and should meaningfully represent the risk profile of the bank's specific equity holdings. The data sample should be long-term in nature and, at a minimum, should encompass at least one complete equity market cycle containing adverse market movements relevant to the risk profile of the bank's modeled exposures. The data used should be sufficient to provide conservative, statistically reliable, and robust loss estimates that are not based purely on subjective or judgmental considerations.
The parameters and assumptions used in a VaR model should be subject to a rigorous and comprehensive regime of stress-testing. Banks utilizing VaR models should subject their internal model and estimation procedures, including volatility computations, to either hypothetical or historical scenarios that reflect worst-case losses given underlying positions in both publicly traded and non-publicly traded equities. At a minimum, banks that use a VaR model should employ stress tests to provide information about the effect of tail events beyond the level of confidence assumed in the IMA.
Banks using non-VaR internal models that are based on stress tests or scenario analyses should estimate losses under worst-case modeled scenarios. These scenarios should reflect the composition of the bank's equity portfolio and should produce risk-based capital requirements at least as large as those that would be required to be held against a representative market index or other relevant benchmark portfolio under a VaR approach. For example, for a portfolio consisting primarily of publicly held equity securities that are actively traded, risk-based capital requirements produced using historical scenario analyses should be greater than or equal to risk-based capital requirements produced by a baseline VaR approach for a major index or sub-index that is representative of the bank's holdings.
The loss estimate derived from the bank's internal model constitutes the risk-based capital requirement for the modeled equity exposures (subject to the supervisory floors described below). The equity capital requirement is incorporated into a bank's risk-based capital ratio through the calculation of risk-weighted equivalent assets. To convert the equity capital requirement into risk-weighted equivalent assets, a bank must multiply the capital requirement by 12.5.
Under the proposed and final rules, as noted above, a bank may apply the IMA only to its publicly traded equity exposures or may apply the IMA to its publicly traded and non-publicly traded equity exposures. In either case, a bank is not allowed to apply the IMA to equity exposures that receive a 0 or 20 percent risk weight under the SRWA, community development equity exposures, and equity exposures to investment funds (collectively, excluded equity exposures). Unlike the SRWA, the IMA does not provide for a 10 percent materiality threshold for non-significant equity exposures.
Several commenters objected to the fact that the IMA does not provide a 100 percent risk weight for non-significant equity exposures up to a 10 percent materiality threshold. These commenters maintained that the lack of a materiality threshold under the IMA will discourage use of this methodology relative to the SRWA. Commenters suggested that the agencies incorporate a materiality threshold into the IMA.
The agencies do not believe that it is necessary or appropriate to incorporate such a threshold under the IMA. The agencies are concerned that a bank could manipulate significantly its risk-based capital requirements based on the exposures it chooses to model and those which it would deem immaterial (and to which it would apply a 100 percent risk weight). The agencies also believe that a flat 100 percent risk weight is inconsistent with the risk sensitivity of the IMA.
Under the proposal, if a bank applied the IMA to both publicly traded and non-publicly traded equity exposures, the bank's aggregate risk-weighted asset amount for its equity exposures would be equal to the sum of the risk-weighted asset amount of excluded equity exposures (calculated outside of the IMA) and the risk-weighted asset amount of the non-excluded equity exposures (calculated under the IMA). The risk-weighted asset amount of the non-excluded equity exposures generally would be set equal to the estimate of potential losses on the bank's non-excluded equity exposures generated by the bank's internal model multiplied by 12.5. To ensure that a bank holds a minimum amount of risk-based capital against its modeled equity exposures, however, the proposed rule contained a supervisory floor on the risk-weighted asset amount of the non-excluded equity exposures. As a result of this floor, the risk-weighted asset amount of the non-excluded equity exposures could not fall below the sum of (i) 200 percent multiplied by the aggregate adjusted carrying value or ineffective portion of hedge pairs, as appropriate, of the bank's non-excluded publicly traded equity exposures; and (ii) 300 percent multiplied by the aggregate adjusted carrying value of the bank's non-excluded non-publicly traded equity exposures.
Also under the proposal, if a bank applied the IMA only to its publicly traded equity exposures, the bank's aggregate risk-weighted asset amount for its equity exposures would be equal to the sum of (i) the risk-weighted asset amount of excluded equity exposures (calculated outside of the IMA); (ii) 400 percent multiplied by the aggregate adjusted carrying value of the bank's non-excluded non-publicly traded equity exposures; and (iii) the aggregate risk-weighted asset amount of its non-excluded publicly traded equity exposures. The risk-weighted asset amount of the non-excluded publicly traded equity exposures would be equal to the estimate of potential losses on the
Several commenters did not support the concept of floors in a risk-sensitive approach that requires a comparison to estimates of potential losses produced by a VaR methodology. If floors are required in the final rule, however, these commenters noted that the calculation at the aggregate level would not pose significant operational issues. A few commenters, in contrast, objected to the proposed aggregate floors, asserting that it would be operationally difficult to determine compliance with such floors.
The agencies believe that it is prudent to retain the floor requirements in the IMA and, thus, are adopting the floor requirements as described above. The agencies note that the New Accord also imposes a 200 percent and 300 percent floor for publicly traded and non-publicly traded equity exposures, respectively. Regarding the proposal to calculate the floors on an aggregate basis, the agencies believe it is appropriate to maintain this approach, given that for most banks it does not seem to pose significant operational issues.
The proposed rule included a separate treatment for equity exposures to investment funds. As proposed, a bank would determine the risk-weighted asset amount for equity exposures to investment funds using one of three approaches: the full look-through approach, the simple modified look-through approach, or the alternative modified look-through approach, unless the equity exposure to an investment fund is a community development equity exposure. Such equity exposures would be subject to a 100 percent risk weight. If an equity exposure to an investment fund is part of a hedge pair, a bank could use the ineffective portion of the hedge pair as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value. A bank could choose to apply a different approach among the three alternatives to different equity exposures to investment funds.
The agencies proposed a separate treatment for equity exposures to an investment fund to prevent banks from arbitraging the proposed rule's risk-based capital requirements for certain high-risk exposures and to ensure that banks do not receive a punitive risk-based capital requirement for equity exposures to investment funds that hold only low-risk assets. Under the proposal, the agencies defined an investment fund as a company (i) all or substantially all of the assets of which are financial assets and (ii) that has no material liabilities.
Generally, commenters supported the separate treatment for equity exposures to investment funds. However, several commenters objected to the exclusion of investment funds with material liabilities from this separate treatment, observing that it would exclude equity exposures to hedge funds. Several commenters suggested that investment funds with material liabilities should be eligible for the look-through approaches. One commenter suggested that the agencies should adopt the following definition of investment fund: “A company in which all or substantially all of the assets are pooled financial assets that are collectively managed in order to generate a financial return, including investment companies or funds with material liabilities.” A few commenters suggested that equity exposures to investment funds with material liabilities should be treated under the SRWA or IMA as non-publicly traded equity exposures rather than the separate treatment developed for equity exposures to investment funds.
The agencies do not agree with commenters that the look-through approaches for investment funds should apply to investment vehicles with material liabilities. The look-through treatment is designed to capture the risks of an indirect holding of the underlying assets of the investment fund. Investment vehicles with material liabilities provide a leveraged exposure to the underlying financial assets and have a risk profile that may not be appropriately captured by a look-through approach.
Under the proposal, each of the approaches to equity exposures to investment funds imposed a 7 percent minimum risk weight on such exposures. This proposed minimum risk weight was similar to the minimum 7 percent risk weight under the RBA for securitization exposures and the effective 56 basis point minimum risk-based capital requirement per dollar of securitization exposure under the SFA.
Several commenters objected to the proposed 7 percent risk weight floor. A few commenters suggested that the floor should be decreased or eliminated, particularly for low-risk investment funds that receive the highest rating from an NRSRO. Others recommended that the 7 percent risk weight floor should be applied on an aggregate basis rather than on a fund-by-fund basis.
The agencies proposed the 7 percent risk weight floor as a minimum risk-based capital requirement for exposures not directly held by a bank. However, the agencies believe the comments on this issue have merit and recognize that the floor would provide banks with an incentive to invest in higher-risk investment funds. Consistent with the New Accord, the final rule does not impose a 7 percent risk weight floor on equity exposures to investment funds, on either an individual or aggregate basis.
A bank may use the full look-through approach only if the bank is able to compute a risk-weighted asset amount for each of the exposures held by the investment fund. Under the proposed rule, a bank would be required to calculate the risk-weighted asset amount for each of the exposures held by the investment fund as if the exposures were held directly by the bank. Depending on whether the exposures were wholesale, retail, securitization, or equity exposures, a bank would apply the appropriate IRB risk-based capital treatment.
Several commenters suggested that the agencies should allow a bank with supervisory approval to use the IMA to model the underlying assets of an investment fund by including the bank's pro rata share of the investment fund's assets in its equities model. The commenters believed there is no basis for preventing a bank from using the IMA, a sophisticated and risk-sensitive approach, when a bank has full position data for an investment fund.
The agencies agree with commenters' views in this regard. If a bank has full position data for an investment fund and has been approved by its primary Federal supervisor for use of the IMA, it may include the underlying equity exposures held by an investment fund, after adjustment for proportional ownership, in its equities model under the IMA. Therefore, in the final rule, under the full look-through approach, a bank must either (i) set the risk-weighted asset amount of the bank's equity exposure to the investment fund
Under the proposed simple modified look-through approach, a bank would set the risk-weighted asset amount for its equity exposure to an investment fund equal to the adjusted carrying value of the equity exposure multiplied by the highest risk weight in Table L that applies to any exposure the fund is permitted to hold under its prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. The bank could exclude derivative contracts that are used for hedging, not speculative purposes, and do not constitute a material portion of the fund's exposures.
Commenters generally supported the simple modified look-through approach as a low-burden yet moderately risk-sensitive way of treating equity exposures to an investment fund. However, several commenters objected to the large jump in risk weights (from a 400 percent to a 1,250 percent risk weight) between investment funds permitted to hold non-publicly traded equity exposures and investment funds permitted to hold OTC derivative contracts and/or exposures that must be deducted from regulatory capital or receive a risk weight greater than 400 percent under the IRB approach. In addition, one commenter objected to the proposed 20 percent risk weight for the most highly rated money market mutual funds that are subject to SEC rule 2a-7 governing portfolio maturity, quality, diversification and liquidity. This commenter asserted that a 7 percent risk weight for such exposures would be appropriate.
The agencies agree that the proposed risk-weighting for highly-rated money market mutual funds subject to SEC rule 2a-7 is conservative, given the generally low risk of such funds. Accordingly, the agencies added a new investment fund approach—the Money Market Fund Approach—which applies a 7 percent risk weight to a bank's equity exposure to a money market fund that is subject to SEC rule 2a-7 and that has an applicable external rating in the highest investment-grade rating category.
The agencies have made no changes to address commenters’ concerns about a lack of intermediate risk weights between 400 percent and 1,250 percent. The agencies believe the range of risk weights is sufficiently granular to accommodate most equity exposures to investment funds.
Under this approach, a bank may assign the adjusted carrying value of an equity exposure to an investment fund on a pro rata basis to different risk-weight categories in Table L based on the investment limits in the fund's prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the bank must assume that the fund invests to the maximum extent permitted under its investment limits in the exposure class with the highest risk weight under Table L, and continues to make investments in the order of the exposure class with the next highest risk-weight under Table L until the maximum total investment level is reached. If more than one exposure class applies to an exposure, the bank must use the highest applicable risk weight. A bank may exclude derivative contracts held by the fund that are used for hedging, not speculative, purposes and do not constitute a material portion of the fund's exposures. Other than comments addressing the risk weight table and the 7 percent floor (addressed above), the agencies did not receive significant comment on this approach and have adopted it without significant change.
This section describes features of the AMA framework for determining the risk-based capital requirement for operational risk. A bank meeting the AMA qualifying criteria uses its internal operational risk quantification system to calculate its risk-based capital requirement for operational risk.
Currently, the agencies' general risk-based capital rules do not include an explicit capital charge for operational risk. Rather, the existing risk-based capital rules were designed to broadly cover all risks, and therefore implicitly cover operational risk. With the adoption of the more risk-sensitive treatment under the IRB approach for credit risk in this final rule, there no
The agencies recognize that operational risk is a key risk in banks, and evidence indicates that a number of factors are driving increases in operational risk. These factors include greater use of automated technology, proliferation of new and highly complex products, growth of e-banking transactions and related business applications, large-scale acquisitions, mergers, and consolidations, and greater use of outsourcing arrangements. Furthermore, the experience of a number of high-profile, high-severity operational losses across the banking industry, including those resulting from legal settlements, highlight operational risk as a major source of unexpected losses. Because the implicit regulatory capital buffer for operational risk is removed under the final rule, the agencies are requiring banks using the IRB approach for credit risk to use the AMA to address operational risk when computing their risk-based capital requirement.
As discussed previously, operational risk exposure is the 99.9th percentile of the distribution of potential aggregate operational losses as generated by the bank's operational risk quantification system over a one-year horizon. EOL is the expected value of the same distribution of potential aggregate operational losses. Under the proposal, a bank's risk-based capital requirement for operational risk would be the sum of EOL and UOL. A bank would be allowed to recognize (i) certain offsets for EOL (such as certain reserves and other internal business practices), and (ii) the effect of risk mitigants such as insurance in calculating its regulatory capital requirement for operational risk.
Under the proposed rule, the agencies recognized that a bank's risk-based capital requirement for operational risk could be based on UOL alone if the bank could demonstrate it has offset EOL with eligible operational risk offsets. Eligible operational risk offsets were defined as amounts, not to exceed EOL, that (i) are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated in a manner consistent with GAAP; and (ii) are available to cover EOL with a high degree of certainty over a one-year horizon. Eligible operational risk offsets could only be used to offset EOL, not UOL.
The preamble to the proposed rule stated that in determining whether to accept a proposed EOL offset, the agencies would consider whether the proposed offset would be available to cover EOL with a high degree of certainty over a one-year horizon. Supervisory recognition of EOL offsets would be limited to those business lines and event types with highly predictable, routine losses. The preamble noted that based on discussions with the industry and supervisory experience, highly predictable and routine losses appear to be limited to those relating to securities processing and to credit card fraud.
The majority of commenters on this issue recommended that the agencies should allow banks to present evidence of additional areas with highly predictable and reasonably stable losses for which eligible operational risk offsets could be considered. These commenters identified fraud losses pertaining to debit or ATM cards, commercial or business credit cards, HELOCs, and external checks in retail banking as additional events that have highly predictable and reasonably stable losses. Commenters also identified legal reserves set aside for small, predictable legal loss events, budgeted funds, and forecasted funds as other items that should be considered eligible operational risk offsets. Several commenters also highlighted that the proposed rule was inconsistent with the New Accord regarding the ability of budgeted funds to serve as EOL offsets. One commenter proposed eliminating EOL altogether because the commenter already factors it into its pricing practices.
The New Accord permits a supervisor to accept expected loss offsets provided a bank is “able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure.”
In determining its operational risk exposure, the bank may also take into account the effects of qualifying operational risk mitigants such as insurance. To recognize the effects of qualifying operational risk mitigants such as insurance for risk-based capital purposes, the bank must estimate its operational risk exposure with and without such effects. The reduction in a bank's risk-based capital requirement for operational risk due to qualifying operational risk mitigants may not exceed 20 percent of the bank's risk-based capital requirement for operational risk, after approved adjustments for EOL offsets.
A risk mitigant must be able to absorb losses with sufficient certainty to warrant inclusion as a qualifying operational risk mitigant. For insurance to meet this standard, it must:
(i) be provided by an unaffiliated company that has a claims paying ability that is rated in one of the three highest rating categories by an NRSRO;
(ii) have an initial term of at least one year and a residual term of more than 90 days;
(iii) have a minimum notice period for cancellation of 90 days;
(iv) have no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed bank; and
(v) be explicitly mapped to an actual operational risk exposure of the bank.
A bank must receive prior written approval from its primary Federal supervisor to recognize an operational risk mitigant other than insurance as a qualifying operational risk mitigant. In evaluating an operational risk mitigant other than insurance, a primary Federal supervisor will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding regulatory capital.
The bank's methodology for incorporating the effects of insurance must capture, through appropriate discounts in the amount of risk mitigation, the residual term of the policy, where less than one year; the policy's cancellation terms, where less than one year; the policy's timeliness of payment; and the uncertainty of payment as well as mismatches in coverage between the policy and the hedged operational loss event. The bank may not recognize for regulatory capital purposes insurance with a residual term of 90 days or less.
Several commenters criticized the proposal for limiting recognition of non-insurance operational risk mitigants to those mitigants that would cover potential operational losses in a manner equivalent to holding regulatory capital. The commenters noted that similar limitations are not included in the New Accord. Other commenters asserted that qualifying operational risk mitigants should be broader than insurance.
The New Accord discusses the use of insurance explicitly as an operational risk mitigant and notes that the BCBS “in due course, may consider revising the criteria for and limits on the recognition of operational risk mitigants
Under the final rule, as under the proposal, if a bank does not qualify to use or does not have qualifying operational risk mitigants, the bank's dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any). If a bank qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the bank's dollar risk-based capital requirement for operational risk is the greater of: (i) The bank's operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); and (ii) 0.8 multiplied by the difference between the bank's operational risk exposure and its eligible operational risk offsets (if any). The dollar risk-based capital requirement for operational risk is multiplied by 12.5 to convert it into an equivalent risk-weighted asset amount. The resulting amount is added to the comparable amount for credit risk in calculating the institution's risk-based capital denominator.
The agencies have long supported meaningful public disclosure by banks with the objective of improving market discipline. The agencies recognize the importance of market discipline in encouraging sound risk management practices and fostering financial stability.
Pillar 3 of the New Accord, market discipline, complements the minimum capital requirements and the supervisory review process by encouraging market discipline through enhanced and meaningful public disclosure. The public disclosure requirements in the final rule are intended to allow market participants to assess key information about a bank's risk profile and its associated level of capital.
The agencies view public disclosure as an important complement to the advanced approaches to calculating minimum regulatory risk-based capital requirements, which will be heavily based on internal systems and methodologies. With enhanced transparency regarding banks' experiences with the advanced approaches, investors can better evaluate a bank's capital structure, risk exposures, and capital adequacy. With sufficient and relevant information, market participants can better evaluate a bank's risk management performance, earnings potential and financial strength.
Improvements in public disclosures come not only from regulatory standards, but also through efforts by bank management to improve communications to public shareholders and other market participants. In this regard, improvements to risk management processes and internal reporting systems provide opportunities to significantly improve public disclosures over time. Accordingly, the agencies strongly encourage the management of each bank to regularly review its public disclosures and enhance these disclosures, where appropriate, to clearly identify all significant risk exposures—whether on-or off-balance sheet—and their effects on the bank's financial condition and performance, cash flow, and earnings potential.
Many commenters expressed concern that the proposed disclosures were excessive, burdensome and overly prescriptive and would hinder—rather than facilitate—market discipline by requiring banks to disclose items that would not be well understood or provide useful information to market participants. In particular, commenters were concerned that the differences between the proposed rule and the New Accord (such as the proposed ELGD risk parameter and proposed wholesale definition of default) would not be meaningful for cross-border comparative purposes, and would increase compliance burden for banks subject to the agencies' risk-based capital rules. Some commenters also believed that the information provided in the disclosures would not be comparable across banks because each bank would use distinct internal methodologies to generate the disclosures. Several commenters suggested that the agencies should delay the disclosure requirements until U.S. implementation of the IRB approach has gained some maturity. This would allow the agencies and banking industry sufficient time to ensure usefulness of the public disclosure requirements and comparability across banks.
The agencies believe that it is important to retain the vast majority of the proposed disclosures, which are consistent with the New Accord. These disclosures will enable market participants to gain key insights regarding a bank's capital structure, risk exposures, risk assessment processes, and ultimately, the capital adequacy of the institution. The agencies also note that many of the disclosure requirements are already required by, or are consistent with, existing GAAP, SEC disclosure requirements, or regulatory reporting requirements for banks. More generally, the agencies view the public disclosure requirements as an integral part of the advanced approaches and the New Accord and are continuing to require their implementation beginning with a bank's first transitional floor period.
The agencies are sympathetic, however, to commenters' concerns about cross-border comparability. The agencies believe that many of the changes they have made to the final rule (such as eliminating the ELGD risk parameter and adopting the New Accord's definition of default for wholesale exposures, as discussed above) will address commenters' concerns regarding comparability. In addition, the agencies have made several changes to the disclosure requirements to make them more consistent with the New Accord. These changes should increase cross-border comparability and reduce implementation and compliance burden. These changes are discussed in the relevant sections below.
Under the proposed rule, the public disclosure requirements would apply to the top-tier legal entity that is a core or opt-in bank within a consolidated banking group—the top-tier U.S. BHC or DI that is a core or opt-in bank.
Several commenters objected to this proposal, noting that it is inconsistent with the New Accord, which requires such disclosures at the global top consolidated level of a banking group to which the framework applies. Commenters asserted that public disclosure at the U.S. BHC or DI level for U.S. banking organizations owned by a foreign banking organization is not meaningful and could generate confusion or misunderstanding in the market.
The agencies agree that commenters' concerns have merit and believe that it is important to be consistent with the
In addition, the proposed rule stated that, in general, a DI that is a subsidiary of a BHC or another DI would not be subject to the disclosure requirements except that every DI would be required to disclose total and tier 1 capital ratios and their components, similar to current requirements. Nonetheless, these entities must file applicable bank regulatory reports and thrift financial reports. In addition, as described below in the regulatory reporting section, the agencies will require certain additional regulatory reporting from banks applying the advanced approaches, and a limited amount of the reported information will be publicly disclosed. If a DI that is a core or opt-in bank and is not a subsidiary of a BHC or another DI that must make the full set of disclosures, the DI would be required to make the full set disclosures.
One commenter objected to the supervisory flexibility provided to require additional disclosures at the subsidiary level. The commenter maintained that in all cases DIs that are a subsidiary of a BHC or another DI should not be subject to the disclosure requirements beyond disclosing their total and tier 1 capital ratios and the ratio components, as proposed. The commenter suggested that the agencies clarify this issue in the final rule.
The agencies do not believe, however, that these changes are appropriate. The agencies believe that it is important to preserve some flexibility in the event that the primary Federal supervisor believes that disclosures from such a DI are important for market participants to form appropriate insights regarding the bank's risk profile and associated level of capital.
The risks to which a bank is exposed, and the techniques that it uses to identify, measure, monitor, and control those risks are important factors that market participants consider in their assessment of the bank. Accordingly, under the proposed and final rules, each bank that is subject to the disclosure requirements must have a formal disclosure policy approved by its board of directors that addresses the bank's approach for determining the disclosures it should make. The policy should address the associated internal controls and disclosure controls and procedures. The board of directors and senior management must ensure that appropriate review of the disclosures takes place and that effective internal controls and disclosure controls and procedures are maintained.
A bank should decide which disclosures are relevant for it based on the materiality concept. Information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions.
To the extent applicable, a bank may fulfill its disclosure requirements under this final rule by relying on disclosures made in accordance with accounting standards or SEC mandates that are very similar to the disclosure requirements in this final rule. In these situations, a bank must explain material differences between the accounting or other disclosure and the disclosures required under this final rule.
Under the proposed rule, the agencies required that quantitative disclosures be made quarterly. Several commenters objected to this requirement. These commenters asserted that banks subject to the U.S. public disclosure requirements would be placed at a competitive disadvantage because the New Accord requires banks to make Pillar 3 public disclosures on a semiannual basis.
The agencies believe that quarterly public disclosure requirements are important to ensure that the market has access to timely and relevant information and therefore have decided to retain quarterly quantitative disclosure requirements in the final rule. This disclosure frequency is consistent with longstanding requirements in the United States for robust quarterly disclosures in financial and regulatory reports, and is appropriate considering the potential for rapid changes in risk profiles. Moreover, many of the existing SEC, regulatory reporting, and other disclosure requirements that a bank may use to help meet its public disclosure requirements in the final rule are already required on a quarterly basis.
The proposal stated that the disclosures must be timely and that the agencies would consider a disclosure to be timely if it was made no later than the reporting deadlines for regulatory reports (for example, FR Y-9C) and financial reports (for example, SEC Forms 10-Q and 10-K). When these deadlines differ, the later deadline should be used.
Several commenters expressed concern that the tight timeframe for public disclosure requirements would be a burden and requested that the agencies provide greater flexibility, such as by setting the deadline for public disclosures at 60 days after quarter-end.
The agencies believe commenters' concerns must be balanced against the importance of allowing market participants to have access to timely information that is reflective of a bank's risk profile and associated capital levels. Accordingly, the agencies have decided to interpret the requirement for timely public disclosures for purposes of this final rule to mean within 45 days after calendar quarter-end.
In some cases, management may determine that a significant change has occurred, such that the most recent reported amounts do not reflect the bank's capital adequacy and risk profile. In those cases, banks should disclose the general nature of these changes and briefly describe how they are likely to affect public disclosures going forward. These interim disclosures should be made as soon as practicable after the determination that a significant change has occurred.
Under the proposed and final rules, the disclosures must be publicly available (for example, included on a public Web site) for each of the latest three years (12 quarters) or such shorter time period since the bank entered its first transitional floor period. Except as discussed below, management has discretion to determine the appropriate medium and location of the disclosures required by this final rule. Furthermore, banks have flexibility in formatting their public disclosures. The agencies are not specifying a fixed format for these disclosures.
The agencies encourage management to provide all of the required disclosures in one place on the entity's public Web site. The public Web site addresses are reported in the regulatory reports (for example, the FR Y-9C).
Disclosure of tier 1 and total capital ratios must be provided in the footnotes to the year-end audited financial statements.
The preamble to the proposed rule stated that due to the importance of reliable disclosures, the agencies would require the chief financial officer to certify that the disclosures required by the proposed rule were appropriate and that the board of directors and senior management were responsible for establishing and maintaining an effective internal control structure over financial reporting, including the information required by the proposed rule.
Several commenters expressed uncertainty regarding the proposed certification requirement for the chief financial officer. One commenter asked the agencies to articulate the standard of acceptance required for the certification of disclosure standards compared with what is required for financial reporting purposes. Another commenter questioned whether the chief financial officer would have sufficient familiarity with the risk management disclosures to make such a certification.
To address commenter uncertainty, the agencies have simplified and clarified the final rule's accountability requirements. Specifically, the final rule modifies the certification requirement and instead requires one or more senior officers of the bank to attest that the disclosures meet the requirements of the final rule. The senior officer may be the chief financial officer, the chief risk officer, an equivalent senior officer, or a combination thereof.
The agencies stated in the preamble to the proposed rule that they believed the proposed requirements strike an appropriate balance between the need for meaningful disclosure and the protection of proprietary and confidential information.
As noted above, the final rule provides banks with considerable discretion with regard to public disclosure requirements. Bank management determines which disclosures are relevant based on a materiality concept. In addition, bank management has flexibility regarding formatting and the level of granularity of disclosures, provided they meet certain minimum requirements. Accordingly, the agencies believe that banks generally can provide these disclosures without revealing proprietary and confidential information. Only in rare circumstances might disclosure of certain items of information required in the final rule compel a bank to reveal confidential and proprietary information. In these unusual situations, the final rule requires that if a bank believes that disclosure of specific commercial or financial information would prejudice seriously the position of the bank by making public information that is either proprietary or confidential in nature, the bank need not disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. This provision of the final rule applies only to those disclosures required by the final rule and does not apply to disclosure requirements imposed by accounting standards or other regulatory agencies.
As in the proposed rule, the public disclosure requirements are comprised of 11 tables that provide important information to market participants on the scope of application, capital, risk exposures, risk assessment processes, and, hence, the capital adequacy of the institution. The agencies are adopting the tables as proposed, with the exceptions noted below. Again, the agencies note that the substantive content of the tables is the focus of the disclosure requirements, not the tables themselves. The table numbers below refer to the table numbers in the final rule.
Table 11.1 disclosures (Scope of Application) include a description of the level in the organization to which the disclosures apply and an outline of any differences in consolidation for accounting and regulatory capital purposes, as well as a description of any restrictions on the transfer of funds and capital within the organization. These disclosures provide the basic context underlying regulatory capital calculations.
One commenter questioned item (e) in Table 11.1, which would require the disclosure of the aggregate amount of capital deficiencies in all subsidiaries and the name(s) of such subsidiaries. The commenter asserted that the scope of this item should be limited to those legal subsidiaries that are subject to banking, securities, or insurance regulators' capital adequacy rules and should not include unregulated entities that are consolidated into the top corporate entity or unconsolidated affiliate and joint ventures.
As stated in a footnote to Table 11.1 in the proposed rule, the agencies limited the proposed requirement to legal subsidiaries that are subject to banking, securities, or insurance regulators' capital adequacy rules. The agencies are further clarifying this disclosure in Table 11.1.
Table 11.2 disclosures (Capital Structure) provide information on various components of regulatory capital available to absorb losses and allow for an evaluation of the quality of the capital available to absorb losses within the bank.
Table 11.3 disclosures (Capital Adequacy) provide information about how a bank assesses the adequacy of its capital and require that the bank disclose its minimum capital requirements for significant risk areas and portfolios. The table also requires disclosure of the regulatory capital ratios of the consolidated group and each DI subsidiary. Such disclosures provide insight into the overall adequacy of capital based on the risk profile of the organization.
Tables 11.4, 11.5, and 11.7 disclosures (Credit Risk) provide market participants with insight into different types and concentrations of credit risk to which the bank is exposed and the
Several commenters made suggestions related to Table 11.4. One commenter addressed item (b), which requires the disclosure of total and average gross credit risk exposures over the period broken down by major types of credit exposure. The commenter asked the agencies to clarify that methods used for financial reporting purposes are allowed for determining averages. Another commenter requested that the agencies clarify what is meant by “gross” in item (b), given that a related footnote describes net credit risk exposures in accordance with GAAP.
As with most of the disclosure requirements, the agencies are not prescriptive regarding the methodologies a bank must use for determining averages. Rather, the bank must choose whatever methodology it believes to be most reflective of its risk position. That methodology may be the one the bank uses for financial reporting purposes. The agencies have deleted “gross” and otherwise simplified the wording of item (b) in Table 11.4 to enhance clarity. Item (b) now reads “total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, and without taking into account the effects of credit risk mitigation techniques (for example collateral and netting not included in GAAP for disclosure), over the period broken down by major types of credit exposure.”
In addition, a commenter noted that the requirements in Table 11.4 regarding the breakdown of disclosures by “major types of credit exposure” in items (b) through (e) and by “counterparty type” for items (d) and (f) are unclear. Moreover, with respect to items (d), (e), and (f), the commenter recommended that disclosures should be provided on an annual rather than quarterly basis. The same commenter also asserted that the disclosure of remaining contractual maturity breakdown in item (e) should be required annually. Finally, regarding items (f) and (g), a few commenters wanted clarification of the definition of impaired and past due loans.
The agencies are not prescriptive with regard to what is meant by “major types of credit exposure,” disclosure by counterparty type, or impaired and past due loans. Bank management has the discretion to determine the most appropriate disclosure for the bank's risk profile consistent with internal practice, GAAP or regulatory reports (such as the FR Y-9C). As noted in the proposal, for major types of credit exposure a bank could apply a breakdown similar to that used for accounting purposes, such as (a) loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures, (b) debt securities, and (c) OTC derivatives. The agencies do not believe it is appropriate to make an exception to the general quarterly requirement for quantitative disclosures for the disclosure in Table 11.4.
Commenters provided extensive feedback on several aspects of Table 11.5 (Disclosures for Portfolios Subject to IRB Risk-Based Capital Formulas). Several commenters were concerned that the required level of detail may compel banks to disclose proprietary information. With respect to item (c), a couple of commenters noted that the proposal differs from the New Accord in requiring exposure-weighted average capital requirements instead of risk weight percentages for groups of wholesale and retail exposures. One commenter also suggested that the term “actual losses” required in item (d) needs to be defined. Finally, several commenters objected to the proposal in item (e) to disclose backtesting results, asserting that such results would not be understood by the market. Commenters suggested that disclosure of this item be delayed beyond the proposed commencement date of year-end 2010, to commence instead ten years after a bank exits from the parallel run period.
As discussed above, the agencies believe that, in most cases, a bank can make the required disclosures without revealing proprietary information and that the rule contains appropriate provisions to deal with specific bank concerns. With regard to item (c), the agencies agree that there is no strong policy reason to differ from the New Accord and have changed item (c) to require the specified disclosures in risk weight percentages rather than weighted-average capital requirements. With respect to item (d), the agencies are not imposing a prescriptive definition of actual losses and believe that banks should determine actual losses consistent with internal practice. Finally, regarding item (e), the agencies believe that public disclosure of backtesting results provides important information to the market and should not be delayed. However, the agencies have slightly modified the requirement, consistent with the New Accord, to reinforce that disclosure of individual risk parameter backtesting is not always required.
Commenters provided feedback on a few aspects of Table 11.7 (Credit Risk Mitigation). One commenter asserted that the table appears to overlap with the information on credit risk mitigation required in Table 11.5, item (a) and requested that the agencies consolidate and simplify the requirements. In addition, several commenters objected to Table 11.7 item (b), which would require public disclosure of the risk-weighted asset amount associated with credit risk exposures that are covered by credit risk mitigation in the form of guarantees and credit derivatives. The commenter noted that this requirement is not contained in the New Accord, which only requires the total exposure amount of such credit risk exposures.
The agencies recognize that there is some duplication between Tables 11.7 and 11.5. At the same time, both requirements are part of the New Accord. The agencies have decided to address this issue by inserting in Table 11.5, item (a), a note that the disclosures can be met by completing the disclosures in Table 11.7. With regard to Table 11.7, item (b), the agencies have decided that there is no strong policy reason for requiring banks to disclose risk-weighted assets associated with credit risk exposures that are covered by credit risk mitigation in the form of guarantees and credit derivatives. The agencies have removed this requirement from the final rule, consistent with the New Accord.
Table 11.6 (General Disclosure for Counterparty Credit Risk of OTC Derivative Contracts, Repo-Style Transaction, and Eligible Margin Loans) provides the disclosure requirements related to credit exposures from derivatives. See the July 2005 BCBS publication entitled “The Application of Basel II to Trading Activities and the Treatment of Double Default Effects.”
Commenters raised a few issues with respect to Table 11.6. One commenter requested that the agencies clarify item (a), which requires a discussion of the impact of the amount of collateral the bank would have to provide given a credit rating downgrade. The commenter asked whether this disclosure refers to credit downgrade of the bank, the counterparty, or some other entity. Another commenter objected to item (b), which would require the breakdown of counterparty credit exposure by type of exposure. The commenter asserted that this proposed requirement is burdensome, infeasible for netted exposures and duplicative of other information generally available in existing GAAP and U.S. bank regulatory financial statements.
The agencies have decided to clarify that item (a) refers in part to the credit rating downgrade of the bank making the disclosure. This is consistent with the intent of this disclosure requirement in the New Accord. With respect to item (b), the agencies recognize that this proposed requirement may be problematic for banks that have implemented the internal models methodology. Accordingly, the agencies have decided to modify the rule to note that this disclosure item is only required for banks not using the internal models methodology in section 32(d).
Table 11.8 disclosures (Securitization) provide information to market participants on the amount of credit risk transferred and retained by the organization through securitization transactions and the types of products securitized by the organization. These disclosures provide users a better understanding of how securitization transactions impact the credit risk of the bank.
One commenter asked the agencies to explicitly acknowledge that they will accept the definitions and interpretations of the components of securitization exposures that a bank uses for financial reporting purposes (FAS 140 reporting disclosures).
Generally, as noted above, the agencies expect that a bank will be able to fulfill some of its disclosure requirements by relying on disclosures made in accordance with accounting standards, SEC mandates, or regulatory reports. In these situations, a bank must explain any material differences between the accounting or other disclosure and the disclosures required under the final rule. The agencies do not believe any changes to the rule are necessary to accommodate the commenter's concern.
Table 11.9 disclosures (Operational Risk) provide insight into the bank's application of the AMA for operational risk and what internal and external factors are considered in determining the amount of capital allocated to operational risk.
Table 11.10 disclosures (Equities Not Subject to Market Risk Rule) provide market participants with an understanding of the types of equity securities held by the bank and how they are valued. The table also provides information on the capital allocated to different equity products and the amount of unrealized gains and losses.
Table 11.11 disclosures (Interest Rate Risk in Non-Trading Activities) provide information about the potential risk of loss that may result from changes in interest rates and how the bank measures such risk.
In addition to the public disclosures required by the consolidated banking organization subject to the advanced approaches, the agencies will require certain additional regulatory reporting from BHCs, their subsidiary DIs, and DIs applying the advanced approaches that are not subsidiaries of BHCs. The agencies believe that the reporting of key risk parameter estimates by each DI applying the advanced approaches will provide the primary Federal supervisor and other relevant supervisors with data important for assessing the reasonableness and accuracy of the bank's calculation of its minimum capital requirements under this final rule and the adequacy of the institution's capital in relation to its risks. This information will be collected through regulatory reports. The agencies believe that requiring certain common reporting across banks will facilitate comparable application of the final rule.
The agencies will publish in the
One commenter expressed concerns that some of the confidential information requested in the proposed reporting templates was also contained in the public disclosure requirements under the proposal. As a result, some information would be classified as confidential in the reporting templates and public under the disclosure requirements in the final rule.
The agencies recognize that there may be some overlap between confidential information required in the regulatory reports and public information required in the disclosure requirements of the final rule. The agencies will address specific comments on the reporting templates separately. In general, the agencies believe that given the different purposes of the regulatory reporting and public disclosure requirements under the final rule, there may be some instances where the same or similar disclosures may be required by both sets of requirements. Many of the public disclosures cover only a subset of the information sought in the proposed regulatory reporting templates. For instance, banks are required only to disclose publicly information “across a sufficient number of PD grades to allow a meaningful differentiation of credit risk,” whereas the proposed reporting templates contemplate a much more granular collection of data by specified PD bands. Such aggregation of data so as to mask the confidential nature of more granular information that is reported to regulators is not unique to the advanced approaches reporting. In addition, the agencies believe that a bank may be able to comply with some of the public disclosure requirements under this final rule by publicly disclosing, at the bank's discretion and judgment, certain information found in the reporting templates that otherwise would be held confidential by the agencies. A bank could disclose this information on its Web site (as described in “location and audit requirements” above) if it believes that such disclosures will meet the public disclosure requirements required by the rule.
The Regulatory Flexibility Act (RFA) requires an agency that is issuing a final rule to prepare and make available a regulatory flexibility analysis that describes the impact of the final rule on small entities. 5 U.S.C. 603(a). The RFA provides that an agency is not required to prepare and publish a regulatory flexibility analysis if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605(b).
Pursuant to section 605(b) of the RFA (5 U.S.C. 605(b)), the agencies certify that this final rule will not have a significant economic impact on a substantial number of small entities. Pursuant to regulations issued by the Small Business Administration (13 CFR 121.201), a “small entity” includes a bank holding company, commercial bank, or savings association with assets of $165 million or less (collectively, small banking organizations). The final rule requires a bank holding company, national bank, state member bank, state nonmember bank, or savings association to calculate its risk-based capital requirements according to certain internal-ratings-based and internal model approaches if the bank holding company, bank, or savings association (i) has consolidated total assets (as reported on its most recent year-end regulatory report) equal to $250 billion or more; (ii) has consolidated total on-balance sheet foreign exposures at the most recent year-end equal to $10 billion or more; or (iii) is a subsidiary of a bank holding company, bank, or savings association that would be required to use the proposed rule to calculate its risk-based capital requirements.
The agencies estimate that zero small bank holding companies (out of a total of approximately 2,919 small bank holding companies), 16 small national banks (out of a total of approximately 948 small national banks), one small state member bank (out of a total of approximately 468 small state member banks), one small state nonmember bank (out of a total of approximately 3,242 small state nonmember banks), and zero small savings associations (out of a total of approximately 419 small savings associations) would be subject to the final rule on a mandatory basis. In addition, each of the small banking organizations subject to the final rule on a mandatory basis is a subsidiary of a bank holding company with over $250 billion in consolidated total assets or over $10 billion in consolidated total on-balance sheet foreign exposure. Therefore, the agencies believe that the final rule will not result in a significant economic impact on a substantial number of small entities.
In accordance with the requirements of the Paperwork Reduction Act of 1995, the agencies may not conduct or sponsor, and respondents are not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. OMB assigned the following control numbers to the collections of information: 1557-0234 (OCC), 3064-0153 (FDIC), and 1550-0115 (OTS). The Board assigned control number 7100-0313.
In September 2006 the OCC, FDIC, and OTS submitted the information collections contained in this rule to OMB for review and approval once the proposed rule was published. The Board, under authority delegated to it by OMB, also submitted the proposed information collection to OMB.
The agencies (OCC, FDIC, the Board, and OTS) determined that sections 21-24, 42, 44, 53, and 71 of the final rule contain collections of information. The final rule sets forth a new risk-based capital adequacy framework that would require some banks and allow other qualifying banks to use an internal ratings-based approach to calculate regulatory credit risk capital requirements and advanced measurement approaches to calculate regulatory operational risk capital requirements. The collections of information are necessary in order to implement the proposed advanced capital adequacy framework. The agencies received approximately ninety public comments. None of the comment letters specifically addressed the proposed burden estimates; therefore, the burden estimates will remain unchanged, as published in the notice of proposed rulemaking (71 FR 55830).
The affected public are: national banks and Federal branches and agencies of foreign banks (OCC); state member banks, bank holding companies, affiliates and certain non-bank subsidiaries of bank holding companies, uninsured state agencies and branches of foreign banks, commercial lending companies owned or controlled by foreign banks, and Edge and agreement corporations (Board); insured nonmember banks, insured state branches of foreign banks, and certain subsidiaries of these entities (FDIC); and savings associations and certain of their subsidiaries (OTS).
The agencies have an ongoing interest in your comments. They should be sent to [Agency] Desk Officer, [OMB No.], by mail to U.S. Office of Management and Budget, 725 17th Street, NW., #10235, Washington, DC 20503, or by fax to (202) 395-6974.
Comments submitted in response to this notice will be shared among the agencies. All comments will become a matter of public record. Written comments should address the accuracy of the burden estimates and ways to minimize burden including the use of automated collection techniques or the use of other forms of information technology as well as other relevant aspects of the information collection request.
Executive Order 12866 requires Federal agencies to prepare a regulatory impact analysis for agency actions that are found to be “significant regulatory actions.” “Significant regulatory actions” include, among other things, rulemakings that “have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or
The OCC anticipates that the final rule will meet the $100 million criterion and therefore is an economically significant regulatory action. In conducting the regulatory analysis for an economically significant regulatory action, Executive Order 12866 requires each Federal agency to provide to the Administrator of the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA):
• The text of the draft regulatory action, together with a reasonably detailed description of the need for the regulatory action and an explanation of how the regulatory action will meet that need;
• An assessment of the potential costs and benefits of the regulatory action, including an explanation of the manner in which the regulatory action is consistent with a statutory mandate and, to the extent permitted by law, promotes the President's priorities and avoids undue interference with State, local, and tribal governments in the exercise of their governmental functions;
• An assessment, including the underlying analysis, of benefits anticipated from the regulatory action (such as, but not limited to, the promotion of the efficient functioning of the economy and private markets, the enhancement of health and safety, the protection of the natural environment, and the elimination or reduction of discrimination or bias) together with, to the extent feasible, a quantification of those benefits;
• An assessment, including the underlying analysis, of costs anticipated from the regulatory action (such as, but not limited to, the direct cost both to the government in administering the regulation and to businesses and others in complying with the regulation, and any adverse effects on the efficient functioning of the economy, private markets (including productivity, employment, and competitiveness), health, safety, and the natural environment), together with, to the extent feasible, a quantification of those costs; and
• An assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation, identified by the agencies or the public (including improving the current regulation and reasonably viable nonregulatory actions), and an explanation why the planned regulatory action is preferable to the identified potential alternatives.
Federal banking law directs Federal banking agencies including the Office of the Comptroller of the Currency (OCC) to require banking organizations to hold adequate capital. The law authorizes Federal banking agencies to set minimum capital levels to ensure that banking organizations maintain adequate capital. The law also gives Federal banking agencies broad discretion with respect to capital regulation by authorizing them to also use any other methods that they deem appropriate to ensure capital adequacy.
Capital regulation seeks to address market failures that stem from several sources. Asymmetric information about the risk in a bank's portfolio creates a market failure by hindering the ability of creditors and outside monitors to discern a bank's actual risk and capital adequacy. Moral hazard creates market failure in which the bank's creditors fail to restrain the bank from taking excessive risks because deposit insurance either fully or partially protects them from losses. Public policy addresses these market failures because individual banks fail to adequately consider the positive externality or public benefit that adequate capital brings to financial markets and the economy as a whole.
Capital regulations cannot be static. Innovation in and transformation of financial markets require periodic reassessments of what may count as capital and what amount of capital is adequate. Continuing changes in financial markets create both a need and an opportunity to refine capital standards in banking. The Basel Committee on Banking Supervision's “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” (New Accord), and its implementation in the United States, reflects an appropriate step forward in addressing these changes.
The capital regulation examined in this analysis will apply to commercial banks and savings associations (collectively, banks). Three banking agencies, the OCC, the Board of Governors of the Federal Reserve System (Board), and the FDIC regulate commercial banks, while the Office of Thrift Supervision (OTS) regulates all federally chartered and many state-chartered savings associations. Throughout this document, the four are jointly referred to as the Federal banking agencies.
The New Accord comprises three mutually reinforcing “pillars” as summarized below.
The first pillar establishes a method for calculating minimum regulatory capital. It sets new requirements for assessing credit risk and operational risk while retaining the approach to market risk as developed in the 1996 amendments to the 1988 Accord.
The New Accord offers banks a choice of three methodologies for calculating a capital charge for credit risk. The first approach, called the Standardized Approach, essentially refines the risk-weighting framework of the 1988 Accord. The other two approaches are variations on an internal ratings-based (IRB) approach that leverages banks' internal credit-rating systems: a “foundation” methodology in which banks estimate the probability of borrower or obligor default, and an “advanced” approach in which banks also supply other inputs needed for the capital calculation. In addition, the new framework uses more risk-sensitive methods for dealing with collateral, guarantees, credit derivatives, securitizations, and receivables.
The New Accord also introduces an explicit capital requirement for operational risk.
The second pillar calls upon banks to have an internal capital assessment process and banking supervisors to evaluate each bank's overall risk profile as well as its risk management and internal control processes. This pillar establishes an expectation that banks hold capital beyond the minimums computed under Pillar 1, including additional capital for any risks that are not adequately captured under Pillar 1. It encourages banks to develop better risk management techniques for monitoring and managing their risks. Pillar 2 also charges supervisors with the responsibility to ensure that banks using advanced Pillar 1 techniques, such as the IRB approach to credit risk and the AMA for operational risk (collectively, advanced approaches), comply with the minimum standards and disclosure requirements of those methods, and take action promptly if capital is not adequate.
The third pillar of the New Accord sets minimum disclosure requirements for banks. The disclosures, covering the composition and structure of the bank's capital, the nature of its risk exposures, its risk management and internal control processes, and its capital adequacy, are intended to improve transparency and strengthen market discipline. By establishing a common set of disclosure requirements, Pillar 3 seeks to provide a consistent and understandable disclosure framework that market participants can use to assess key pieces of information on the risks and capital adequacy of a bank.
The rule for implementing the New Accord's advanced approaches in the United States will apply the new framework to the largest and most internationally active banks. All banks will fall into one of three regulatory categories. The first category, called “mandatory” banks, consists of banks with consolidated assets of at least $250 billion or consolidated on-balance-sheet foreign exposures of $10 billion or more. Mandatory banks will have to use the New Accord's most advanced methods only: the Advanced IRB approach to determine capital for credit risk and the AMA to determine capital for operational risk. A second category of banks, called “opt-in” banks, includes banks that do not meet either size criteria of a mandatory bank but choose voluntarily to comply with the advanced approaches specified under the New Accord. The third category, called “general” banks, encompasses all other banks, and these will continue to operate under existing risk-based capital rules, subject to any amendments.
Various changes to the rules that apply to non-mandatory banks are under consideration. The Federal banking agencies have decided to issue for comment a proposal that would allow the voluntary adoption of the standardized approach for credit risk and the basic indicator approach for operational risk for non-mandatory banks (referred to hereafter as the Standardized Option). Because the Standardized Option would be a separate rulemaking, our analysis will focus just on the implementation of the Advanced Approaches. However, we will note how the Standardized Option might affect the outcome of our analysis if we anticipate the possibility that its adoption could lead to a significantly different outcome.
While introducing many significant changes, the U.S. implementation of the New Accord retains many components of the capital rules currently in effect. For example, it preserves existing Prompt Corrective Action provisions for all banks. The U.S. implementation of the New Accord also keeps intact most elements of the definition of what comprises regulatory capital.
This analysis considers the costs and benefits of the fully phased-in rule. Under the rule, current capital rules will remain in effect in 2008 during a parallel run using both old and new capital rules. For three years following the parallel run, the final rule will apply limits on the amount by which minimum required capital may decrease. This analysis, however, considers the costs and benefits of the rule as fully phased in.
Cost and benefit analysis of changes in minimum capital requirements entail considerable measurement problems. On the cost side, it can be difficult to attribute particular expenditures incurred by banks to the costs of implementation because banks would likely incur some of these costs as part of their ongoing efforts to improve risk measurement and management systems. On the benefits side, measurement problems are even greater because the benefits of the rule are more qualitative than quantitative. Measurement problems exist even with an apparently measurable effect such as lower minimum capital because lower minimum requirements do not necessarily mean lower capital levels held by banks. Healthy banks generally hold capital well above regulatory minimums for a variety of reasons, and the effect of reducing the regulatory minimum is uncertain and may vary across regulated banks.
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Because banks are constantly developing programs and systems to improve how they measure and manage risk, it is difficult to distinguish between expenditures explicitly caused by adoption of this final rule and costs that would have occurred irrespective of any new regulation. In an effort to identify how much banks expect to spend to comply with the U.S. implementation of the New Accord's advanced approaches, the Federal banking agencies included several questions related to compliance costs in the fourth Quantitative Impact Study (QIS-4).
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One potential concern with any regulatory change is the possibility that it might create a competitive advantage for some banks relative to others, a possibility that certainly applies to a change with the scope of this final rule. However, measurement difficulties described in the preceding discussion of costs and benefits also extend to any consideration of the impact on competition. Despite the inherent difficulty of drawing definitive conclusions, this section considers various ways in which competitive effects might be manifest, as well as available evidence related to those potential effects.
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Overall, the evidence regarding the impact of this final rule on competitive equity is mixed. The body of recent economic research discussed in the body of this report does not reveal persuasive evidence of any sizeable competitive effects. Nonetheless, the Federal banking agencies recognize the need to closely monitor the competitive landscape subsequent to any regulatory change. In particular, the OCC and other Federal banking agencies will be alert for early signs of competitive inequities that might result from this final rule. A multi-year transition period before full implementation of this final rule should provide ample opportunity for the Federal banking agencies to identify any emerging problems. In particular, after the end of the second transition year, the agencies will conduct and publish a study that evaluates the advanced approaches to determine if there are any material deficiencies.
In order to place the costs and benefits of the rule in context, Executive Order 12866 requires a comparison between this final rule, a baseline of what the world would look like without this final rule, and several reasonable alternatives to the rule. In this regulatory impact analysis, we analyze a baseline and three alternatives to the rule. The baseline analyzes the situation where the Federal banking agencies do not adopt this final rule, but other countries with internationally active banks do adopt the New Accord.
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Under Alternative B, direct costs would increase for every U.S. bank that would have continued with current capital rules. It is not clear how much it might cost banks to adopt these capital measures for operational risk, but general banks would face higher costs because they would be changing capital rules regardless of which option they choose under Alternative B.
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The New Accord and its U.S. implementation seek to incorporate risk measurement and risk management advances into capital requirements. Risk-sensitive capital requirements are integral to ensuring an adequate capital cushion to absorb financial losses at large complex financial banks. In implementing the New Accord's advanced approaches in the United States, the agencies' intent is to achieve risk-sensitivity while maintaining a regulatory capital regime that is as rigorous as the current system. Total capital requirements under the advanced approaches, including capital for operational risk, will better allocate capital in the system. This will occur regardless of whether the minimum required capital at a particular bank is greater or less than it would be under current capital rules. In order to ensure that we achieve our goal of increased risk sensitivity without loss of rigor, the final rule provides a means for the agencies to identify and address deficiencies in the capital requirements that may become apparent during the transition period.
Although the anticipated benefits of the final rule are difficult to quantify in dollar terms because of measurement problems, the OCC is confident that the anticipated benefits well exceed the anticipated costs of this regulation. On the basis of our analysis, we believe that the benefits of the final rule are significant, durable, and hold the potential to increase with time. The offsetting costs of implementing the final rule are also significant, but appear to be largely because of considerable start-up costs. However, much of the apparent start-up costs reflect activities that the banks would undertake as part of their ongoing efforts to improve the quality of their internal risk measurement and management, even in the absence of the New Accord and this final rule. The advanced approaches seem to have fairly modest ongoing expenses. Against these costs, the significant benefits of the New Accord suggest that the final rule offers an improvement over the baseline scenario.
With regard to the three alternative approaches we consider, the final rule offers an important degree of flexibility while significantly restricting costs by limiting its application to large, internationally active banks. Alternatives A and B introduce more flexibility from the perspective of the large mandatory banks, but each is less flexible with respect to other banks. Either Alternative A or B would compel these non-mandatory banks to select a new set of capital rules and require them to undertake the time and expense of adjusting to this final rule. Alternative C would change the number of mandatory banks. If the number of mandatory banks increases, then the new rule would lose some of the flexibility it achieves with the opt-in option. Furthermore, costs would increase as the final rule would compel more banks to incur the expense of adopting the advanced approaches. Decreasing the number of mandatory banks would decrease the aggregate social good of each benefit achieved with the final rule. The final rule offers a better balance between costs and benefits than any of the three alternatives.
OTS commented on the development of, and concurs with, OCC's RIA. Rather than replicate that analysis, OTS drafted an RIA incorporating OCC's analysis by reference and adding appropriate material reflecting the unique aspects of the thrift industry. The full text of OTS's RIA is available at the locations for viewing the OTS docket indicated in the
The following discussion supplements OCC's summary of its RIA.
The final rule will apply to approximately six mandatory and potential opt-in savings associations representing approximately 52 percent of total thrift industry assets. Approximately 76 percent of the total assets in these six institutions are concentrated in residential mortgage-related assets. By contrast, national banks tend to concentrate their assets in commercial loans and other kinds of non-mortgage loans. Only about 35 percent of national bank's total assets are residential mortgage-related assets. As a result, the costs and benefits of the final rule for OTS-regulated savings associations will differ in important ways from OCC-regulated national banks. These differences are the focus of OTS's analysis.
Because of the typically low credit risk associated with residential mortgage-related assets, OTS believes that the risk-insensitive leverage ratio, rather than the risk-based capital ratio, may be more binding on savings association institutions.
In addition, the results from QIS-3 and QIS-4 suggest that the largest reductions in regulatory credit-risk capital requirements from the application of revised rules would occur in the residential mortgage loan area. Thus, to the extent regulatory credit-risk capital requirements affect pricing of such loans, it is possible that core and opt-in institutions who are not constrained by the leverage ratio may experience an improvement in their competitive standing vis-à-vis non-adopters and vis-à-vis adopters who are bound by the leverage ratio. Two research papers—one by Calem and Follain,
The final rule also has a ten percent floor on loss given default parameter estimates for residential mortgage segments that persists beyond the two-year period articulated in the international Basel II framework, providing a disincentive for core institutions to hold the least risky residential mortgages. This may have the effect of reducing the core banks” advantage vis-à-vis both non-adopters and their international competitors.
Further, residential mortgages are subject to substantial interest rate risk. The agencies will retain the authority to require additional capital to cover interest rate risk. If regulatory capital requirements affect asset pricing, a substantial regulatory capital interest rate risk component could mitigate any competitive advantages of the proposed rule. Moreover, the capital requirement for interest rate risk would be subject to interpretation by each agency. A consistent evaluation of interest rate risk by the supervisory agencies would present a level playing field among the adopters—an important consideration given the potential size of the capital requirement.
The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) (UMRA) requires cost-benefit and other analyses for a rule that would include any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more (adjusted annually for inflation) in any one year. The current inflation-adjusted expenditure threshold is $119.6 million. The requirements of the UMRA include assessing a rule's effects on future compliance costs; particular regions or State, local, or tribal governments; communities; segments of the private sector; productivity; economic growth; full employment; creation of productive jobs; and the international competitiveness of U.S. goods and services. The final rule qualifies as a significant regulatory action under the UMRA because its Federal mandates may result in the expenditure by the private sector of $119.6 million or more in any one year. As permitted by section 202(c) of the UMRA, the required analyses have been prepared in conjunction with the Executive Order 12866 analysis document titled
The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) (UMRA) requires cost-benefit and other analyses for a rule that would include any Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more (adjusted annually for inflation) in any one year. The current inflation-adjusted expenditure threshold is $119.6 million. The requirements of the UMRA include assessing a rule's effects on future compliance costs; particular regions or State, local, or tribal governments; communities; segments of the private sector; productivity; economic growth; full employment; creation of productive jobs; and the international competitiveness of U.S. goods and services. The final rule qualifies as a significant regulatory action under the UMRA because its Federal mandates may result in the expenditure by the private sector of $119.6 or more in any one year. As permitted by section 202(c) of the UMRA, the required analyses have been prepared in conjunction with the Executive Order 12866 analysis document titled
The text of the agencies” common appendix appears below:
(a)
(1) Minimum qualifying criteria for [banks] using [bank]-specific internal risk measurement and management processes for calculating risk-based capital requirements;
(2) Methodologies for such [banks] to calculate their risk-based capital requirements; and
(3) Public disclosure requirements for such [banks].
(b)
(i) Has consolidated total assets, as reported on the most recent year-end Consolidated Report of Condition and Income (Call Report) or Thrift Financial Report (TFR), equal to $250 billion or more;
(ii) Has consolidated total on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more (where total on-balance sheet foreign exposure equals total cross-border claims less claims with head office or guarantor located in another country plus redistributed guaranteed amounts to the country of head office or guarantor plus local country claims on local residents plus revaluation gains on foreign exchange and derivative products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report);
(iii) Is a subsidiary of a depository institution that uses 12 CFR part 3, Appendix C, 12 CFR part 208, Appendix F, 12 CFR part 325, Appendix D, or 12 CFR part 567, Appendix C, to calculate its risk-based capital requirements; or
(iv) Is a subsidiary of a bank holding company that uses 12 CFR part 225, Appendix G, to calculate its risk-based capital requirements.
(2) Any [bank] may elect to use this appendix to calculate its risk-based capital requirements.
(3) A [bank] that is subject to this appendix must use this appendix unless the [AGENCY] determines in writing that application of this appendix is not appropriate in light of the [bank]'s asset size, level of complexity, risk profile, or scope of operations. In making a determination under this paragraph, the [AGENCY] will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 3.12 (for national banks), 12 CFR 263.202 (for bank holding companies and state member banks), 12 CFR 325.6(c) (for state nonmember banks), and 12 CFR 567.3(d) (for savings associations).
(c)
(2)
(ii) If the [AGENCY] determines that the risk-weighted asset amount for operational risk produced by the [bank] under this appendix is not commensurate with the operational risks of the [bank], the [AGENCY] may require the [bank] to assign a different risk-weighted asset amount for operational risk, to change elements of its operational risk analytical framework, including distributional and dependence assumptions, or to make other changes to the [bank]'s operational risk management processes, data and assessment systems, or quantification systems, all as specified by the [AGENCY].
(3)
(d)
(1) The [bank] can demonstrate on an ongoing basis to the satisfaction of the [AGENCY] that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this appendix;
(2) The [bank] appropriately manages the risk of each such exposure;
(3) The [bank] notifies the [AGENCY] in writing prior to applying this principle to each such exposure; and
(4) The exposures to which the [bank] applies this principle are not, in the aggregate, material to the [bank].
(1) With respect to an exposure that has multiple external ratings assigned by NRSROs, the lowest solicited external rating assigned to the exposure by any NRSRO; and
(2) With respect to an exposure that has a single external rating assigned by an NRSRO, the external rating assigned to the exposure by the NRSRO.
(1) With respect to an exposure that has multiple inferred ratings, the lowest inferred rating based on a solicited external rating; and
(2) With respect to an exposure that has a single inferred rating, the inferred rating.
(1) Has an external rating; and
(2) Is backed by underlying exposures held in a bankruptcy-remote SPE.
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP program;
(3) Approves the exposures to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the underlying exposures, underwriting or otherwise arranging for the placement of debt or other obligations issued by the program, compiling monthly reports, or ensuring compliance with the program documents and with the program's credit and investment policy.
(1) Owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
(1) The originating [bank] has appropriate policies and procedures to ensure that it has sufficient capital and liquidity available in the event of an early amortization;
(2) Throughout the duration of the securitization (including the early amortization period), there is the same pro rata sharing of interest, principal, expenses, losses, fees, recoveries, and other cash flows from the underlying exposures based on the originating [bank]'s and the investors' relative shares of the underlying exposures outstanding measured on a consistent monthly basis;
(3) The amortization period is sufficient for at least 90 percent of the total underlying exposures outstanding at the beginning of the early amortization period to be repaid or recognized as in default; and
(4) The schedule for repayment of investor principal is not more rapid than would be allowed by straight-line amortization over an 18-month period.
(1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and
(2) Exposes the holder to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder's claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques.
(1) Early default clauses and similar warranties that permit the return of, or premium refund clauses that cover, first-lien residential mortgage exposures for a period not to exceed 120 days from the date of transfer, provided that the date of transfer is within one year of origination of the residential mortgage exposure;
(2) Premium refund clauses that cover underlying exposures guaranteed, in whole or in part, by the U.S. government, a U.S. government agency, or a U.S. government sponsored enterprise, provided that the clauses are for a period not to exceed 120 days from the date of transfer; or
(3) Warranties that permit the return of underlying exposures in instances of misrepresentation, fraud, or incomplete documentation.
(1) Total wholesale and retail risk-weighted assets;
(2) Risk-weighted assets for securitization exposures; and
(3) Risk-weighted assets for equity exposures.
(A) The exposure is 180 days past due, in the case of a residential mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of all other retail exposures; or
(C) The [bank] has taken a full or partial charge-off, write-down of principal, or material negative fair value adjustment of principal on the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a retail exposure held by a non-U.S. subsidiary of the [bank] that is subject to an internal ratings-based approach to capital adequacy consistent with the Basel Committee on Banking Supervision's “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” in a non-U.S. jurisdiction, the [bank] may elect to use the definition of default that is used in that jurisdiction, provided that the [bank] has obtained prior approval from the [AGENCY] to use the definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the [bank] has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure.
(2)
(A) The [bank] determines that the obligor is unlikely to pay its credit obligations to the [bank] in full, without recourse by the [bank] to actions such as realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material credit obligation(s) to the [bank].
(ii) An obligor in default remains in default until the [bank] has reasonable assurance of repayment and performance for all contractual principal and interest payments on all exposures of the [bank] to the obligor (other than exposures that have been fully written-down or charged-off).
(1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating [bank] (such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by obligors on the underlying exposures even after the provision is triggered.
(1) For wholesale exposures other than repo-style transactions, eligible margin loans, and OTC derivative contracts described in paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years, whole or fractional) of the expected contractual cash flows from the exposure, using the undiscounted amounts of the cash flows as weights; or
(ii) The nominal remaining maturity (measured in years, whole or fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement for which the [bank] does not apply the internal models approach in paragraph (d) of section 32 of this appendix, the weighted-average remaining maturity (measured in years, whole or fractional) of the individual transactions subject to the qualifying master netting agreement, with the weight of each individual transaction set equal to the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC derivative contracts for which the [bank] applies the internal models approach in paragraph (d) of section 32 of this appendix, the value determined in paragraph (d)(4) of section 32 of this appendix.
(1) Is exercisable solely at the discretion of the originating [bank] or servicer;
(2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and
(3) (i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding.
(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 or n
(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) Bankruptcy, insolvency, or inability of the obligor on the reference exposure 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 provides that any required consent to transfer may not be unreasonably withheld;
(7) If the credit derivative is a credit default swap or n
(8) If the credit derivative is a total return swap and the [bank] records net payments received on the swap as net income, the [bank] records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves).
(1)
(i) At the time the guarantor issued the guarantee or credit derivative or at any time thereafter, the [bank] assigned a PD to the guarantor's rating grade that was equal to or lower than the PD associated with a long-term external rating in the third-highest investment-grade rating category; and
(ii) The [bank] currently assigns a PD to the guarantor's rating grade that is equal to or lower than the PD associated with a long-term external rating in the lowest investment-grade rating category; or
(2)
(i) The [bank] demonstrates that the guarantor is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be), or has issued and outstanding an unsecured long-term debt security without credit enhancement that has a long-term applicable external rating of at least investment grade;
(ii) At the time the guarantor issued the guarantee or credit derivative or at any time thereafter, the [bank] assigned a PD to the guarantor's rating grade that was equal to or lower than the PD associated with a long-term external rating in the third-highest investment-grade rating category; and
(iii) The [bank] currently assigns a PD to the guarantor's rating grade that is equal to or lower than the PD associated with a long-term external rating in the lowest investment-grade rating category.
(1) Is written and unconditional;
(2) Covers all or a pro rata portion of all contractual payments of the obligor on the reference exposure;
(3) Gives the beneficiary a direct claim against the protection provider;
(4) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(5) Is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;
(6) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligor on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment;
(7) Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; and
(8) Is not provided by an affiliate of the [bank], unless the affiliate is an insured depository institution, bank, securities broker or dealer, or insurance company that:
(i) Does not control the [bank]; and
(ii) Is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions, securities broker-dealers, or insurance companies (as the case may be).
(1) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, gold, or conforming residential mortgages;
(2) The collateral is marked to market daily, and the transaction is subject to daily margin maintenance requirements;
(3) The extension of credit is conducted under an agreement that provides the [bank] the right to accelerate and terminate the extension of credit and to liquidate or set off collateral promptly upon an event of default (including upon an event of bankruptcy, insolvency, or similar proceeding) of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;
(4) The [bank] has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that the agreement meets the requirements of paragraph (3) of this definition and is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(1) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon.
(1) The [bank] or securitization SPE purchased from an unaffiliated seller and did not directly or indirectly originate;
(2) Was generated on an arm's-length basis between the seller and the obligor (intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other do not satisfy this criterion);
(3) Provides the [bank] or securitization SPE with a claim on all proceeds from the exposure or a pro rata interest in the proceeds from the exposure;
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a concentrated exposure relative to the portfolio of purchased wholesale exposures.
(1) A sovereign entity, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), a multilateral development bank, a depository institution, a bank holding company, a savings and loan holding company (as defined in 12 U.S.C. 1467a) provided all or substantially all of the holding company's activities are permissible for a financial holding company under 12 U.S.C. 1843(k), a foreign bank (as defined in § 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a securities firm;
(2) Any other entity (other than a securitization SPE) that has issued and outstanding an unsecured long-term debt security without credit enhancement that has a long-term applicable external rating in one of the three highest investment-grade rating categories; or
(3) Any other entity (other than a securitization SPE) that has a PD assigned by the [bank] that is lower than or equal to the PD associated with a long-term external rating in the third highest investment-grade rating category.
(1) The servicer is entitled to full reimbursement of advances, except that a servicer may be obligated to make non-reimbursable advances for a particular underlying exposure if any such advance is contractually limited to an insignificant amount of the outstanding principal balance of that exposure;
(2) The servicer's right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not, make advances to the securitization if the servicer concludes the advances are unlikely to be repaid.
(1) A security or instrument (whether voting or non-voting) that represents a direct or indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the [bank] under GAAP;
(ii) The [bank] is required to deduct the ownership interest from tier 1 or tier 2 capital under this appendix;
(iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition.
(1) Gross finance charge collections and other income received by a securitization SPE (including market interchange fees) over a period minus interest paid to the holders of the securitization exposures, servicing fees, charge-offs, and other senior trust or similar expenses of the SPE over the period; divided by
(2) The principal balance of the underlying exposures at the end of the period.
(1) For a wholesale exposure to a non-defaulted obligor or segment of non-defaulted retail exposures that is carried at fair value with gains and losses flowing through earnings or that is classified as held-for-sale and is carried at the lower of cost or fair value with losses flowing through earnings, zero.
(2) For all other wholesale exposures to non-defaulted obligors or segments of non-defaulted retail exposures, the product of PD times LGD times EAD for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, the [bank]'s impairment estimate for allowance purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all wholesale and retail exposures other than exposures for which the [bank] has applied the double default treatment in section 34 of this appendix.
(i) If the exposure or segment is a security classified as available-for-sale, the [bank]'s carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment, less any unrealized gains on the exposure or segment, and plus any unrealized losses on the exposure or segment; or
(ii) If the exposure or segment is not a security classified as available-for-sale, the [bank]'s carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment.
(2) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, or a repo-style transaction or eligible margin loan for which the [bank] determines EAD under section 32 of this appendix) in the form of a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the [bank]'s best estimate of net additions to the outstanding amount owed the [bank], including estimated future additional draws of principal and accrued but unpaid interest and fees, that are likely to occur over a one-year horizon assuming the wholesale exposure or the retail exposures in the segment were to go into default. This estimate of net additions must reflect what would be expected during economic downturn conditions. Trade-related letters of credit are short-term, self-liquidating instruments that are used to finance the movement of goods and are collateralized by the underlying goods. Transaction-related contingencies relate to a particular transaction and include, among other things, performance bonds and performance-based letters of credit.
(3) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, or a repo-style transaction or eligible margin loan for which the [bank] determines EAD under section 32 of this appendix) in the form of anything other than a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described in section 32 of this appendix. A [bank] also may determine EAD for repo-style transactions and eligible margin loans as described in section 32 of this appendix.
(5) For wholesale or retail exposures in which only the drawn balance has been securitized, the [bank] must reflect its share of the exposures' undrawn balances in EAD. Undrawn balances of revolving exposures for which the drawn balances have been securitized must be allocated between the seller's and investors' interests on a pro rata basis, based on the proportions of the seller's and investors' shares of the securitized drawn balances.
(1) The credit rating fully reflects the entire amount of credit risk with regard to all payments owed to the holder of the exposure. If a holder is owed principal and interest on an exposure, the credit rating must fully reflect the credit risk associated with timely repayment of principal and interest. If a holder is owed only principal on an exposure, the credit rating must fully reflect only the credit risk associated with timely repayment of principal; and
(2) The credit rating is published in an accessible form and is or will be included in the transition matrices made publicly available by the NRSRO that summarize the historical performance of positions rated by the NRSRO.
(1) In the form of:
(i) Cash on deposit with the [bank] (including cash held for the [bank] by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that have an applicable external rating of one category below investment grade or higher;
(iv) Short-term debt instruments that have an applicable external rating of at least investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded;
(vii) Money market mutual fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; or (viii) Conforming residential mortgages; and
(2) In which the [bank] has a perfected, first priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit and notwithstanding the prior security interest of any custodial agent).
(1) One- to four-family residential properties; or
(2) Commercial real estate projects in which:
(i) The loan-to-value ratio is less than or equal to the applicable maximum
(ii) The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate's appraised “as completed” value; and
(iii) The borrower contributed the amount of capital required by paragraph (2)(ii) of this definition before the [bank] advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project. The life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full. Permanent financing may be provided by the [bank] that provided the ADC facility as long as the permanent financing is subject to the [bank]'s underwriting criteria for long-term mortgage loans.
(1) The securitization exposure does not have an external rating; and
(2) Another securitization exposure issued by the same issuer and secured by the same underlying exposures:
(i) Has an external rating;
(ii) Is subordinated in all respects to the unrated securitization exposure;
(iii) Does not benefit from any credit enhancement that is not available to the unrated securitization exposure; and
(iv) Has an effective remaining maturity that is equal to or longer than that of the unrated securitization exposure.
(1) All or substantially all of the assets of which are financial assets; and
(2) That has no material liabilities.
(1) The total amount of securitization exposures issued by the securitization SPE to investors; divided by
(2) The outstanding principal amount of underlying exposures.
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The [bank]'s empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the [bank] would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the [bank] to the exposure) were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The [bank]'s empirically based best estimate of the economic loss, per dollar of EAD, the [bank] would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the [bank] to the exposure) were to default within a one-year horizon during economic downturn conditions.
(2) For a segment of retail exposures, the greatest of:
(i) Zero;
(ii) The [bank]'s empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the [bank] would expect to incur if the exposures in the segment were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or
(iii) The [bank]'s empirically based best estimate of the economic loss, per dollar of EAD, the [bank] would expect to incur if the exposures in the segment were to default within a one-year horizon during economic downturn conditions.
(3) The economic loss on an exposure in the event of default is all material credit-related losses on the exposure (including accrued but unpaid interest or fees, losses on the sale of collateral, direct workout costs, and an appropriate allocation of indirect workout costs). Where positive or negative cash flows on a wholesale exposure to a defaulted obligor or a defaulted retail exposure (including proceeds from the sale of collateral, workout costs, additional extensions of credit to facilitate repayment of the exposure, and draw-downs of unused credit lines) occur after the date of default, the economic loss must reflect the net present value of cash flows as of the default date using a discount rate appropriate to the risk of the defaulted exposure.
(1) Exposures to the same legal entity or natural person denominated in different currencies;
(2) (i) An income-producing real estate exposure for which all or substantially all of the repayment of the exposure is reliant on the cash flows of the real estate serving as collateral for the exposure; the [bank], in economic substance, does not have recourse to the borrower beyond the real estate collateral; and no cross-default or cross-acceleration clauses are in place other than clauses obtained solely out of an abundance of caution; and
(ii) Other credit exposures to the same legal entity or natural person; and
(3) (i) A wholesale exposure authorized under section 364 of the U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person who is a debtor-in-possession for purposes of Chapter 11 of the Bankruptcy Code; and
(ii) Other credit exposures to the same legal entity or natural person.
(1) Internal fraud, which means the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate
(2) External fraud, which means the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property, or circumvent the law. Retail credit card losses arising from non-contractual, third-party initiated fraud (for example, identity theft) are external fraud operational losses. All other third-party initiated credit losses are to be treated as credit risk losses.
(3) Employment practices and workplace safety, which means the operational loss event type category that comprises operational losses resulting from an act inconsistent with employment, health, or safety laws or agreements, payment of personal injury claims, or payment arising from diversity- and discrimination-type events.
(4) Clients, products, and business practices, which means the operational loss event type category that comprises operational losses resulting from the nature or design of a product or from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements).
(5) Damage to physical assets, which means the operational loss event type category that comprises operational losses resulting from the loss of or damage to physical assets from natural disaster or other events.
(6) Business disruption and system failures, which means the operational loss event type category that comprises operational losses resulting from disruption of business or system failures.
(7) Execution, delivery, and process management, which means the operational loss event type category that comprises operational losses resulting from failed transaction processing or process management or losses arising from relations with trade counterparties and vendors.
(1) Directly or indirectly originated or securitized the underlying exposures included in the securitization; or
(2) Serves as an ABCP program sponsor to the securitization.
(1) An exposure to an individual for non-business purposes; or
(2) An exposure to an individual or company for business purposes if the [bank]'s consolidated business credit exposure to the individual or company is $1 million or less.
(1) For a wholesale exposure to a non-defaulted obligor, the [bank]'s empirically based best estimate of the long-run average one-year default rate for the rating grade assigned by the [bank] to the obligor, capturing the average default experience for obligors in the rating grade over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the rating grade.
(2) For a segment of non-defaulted retail exposures, the [bank]'s empirically based best estimate of the long-run average one-year default rate for the exposures in the segment, capturing the average default experience for exposures in the segment over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the segment and adjusted upward as appropriate for segments for which seasoning effects are material. For purposes of this definition, a segment for which seasoning effects are material is a segment where there is a material relationship between the time since origination of exposures within the segment and the [bank]'s best estimate of the long-run average one-year default rate for the exposures in the segment.
(3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, 100 percent.
(1) Any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in question, meaning that there are enough independent bona fide offers to buy and sell so that a sales price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined promptly and a trade can be settled at such a price within five business days.
(1) Facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts;
(2) Requires all participants in its arrangements to be fully collateralized on a daily basis; and
(3) The [bank] demonstrates to the satisfaction of the [AGENCY] is in sound financial condition and is subject to effective oversight by a national supervisory authority.
(1) The underlying financial transactions are OTC derivative contracts, eligible margin loans, or repo-style transactions; and
(2) The [bank] obtains a written legal opinion verifying the validity and enforceability of the agreement under applicable law of the relevant jurisdictions if the counterparty fails to perform upon an event of default, including upon an event of bankruptcy, insolvency, or similar proceeding.
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including bankruptcy, insolvency, or similar proceeding, of the counterparty;
(2) The agreement provides the [bank] the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of bankruptcy, insolvency, or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions;
(3) The [bank] has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this definition; and
(ii) In the event of a legal challenge (including one resulting from default or from bankruptcy, insolvency, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions;
(4) The [bank] establishes and maintains procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of this definition; and
(5) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it would make otherwise under the agreement, or no
(1) Is revolving (that is, the amount outstanding fluctuates, determined largely by the borrower's decision to borrow and repay, up to a pre-established maximum amount);
(2) Is unsecured and unconditionally cancelable by the [bank] to the fullest extent permitted by Federal law; and
(3) Has a maximum exposure amount (drawn plus undrawn) of up to $100,000.
(1) The transaction is based solely on liquid and readily marketable securities, cash, gold, or conforming residential mortgages;
(2) The transaction is marked-to-market daily and subject to daily margin maintenance requirements;
(3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides the [bank] the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set off collateral promptly upon an event of default (including upon an event of bankruptcy, insolvency, or similar proceeding) of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions; or
(B) The transaction is:
(
(
(4) The [bank] has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that the agreement meets the requirements of paragraph (3) of this definition and is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(1) An exposure that is primarily secured by a first or subsequent lien on one- to four-family residential property; or
(2) An exposure with an original and outstanding amount of $1 million or less that is primarily secured by a first or subsequent lien on residential property that is not one to four family.
S
(1) A direct exposure to a sovereign entity; or
(2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign entity.
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure);
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities).
(1) The sum of:
(i) Credit risk-weighted assets; and
(ii) Risk-weighted assets for operational risk; minus
(2) Excess eligible credit reserves not included in tier 2 capital.
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682); and
(7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under 12 U.S.C. 24(Eleventh).
(8) The [AGENCY] may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction's leverage, risk profile, or economic substance.
(9) The [AGENCY] may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction's leverage, risk profile, or economic substance.
(1) A non-tranched guarantee issued by a [bank] on behalf of a company;
(2) A repo-style transaction entered into by a [bank] with a company and any other transaction in which a [bank] posts collateral to a company and faces counterparty credit risk;
(3) An exposure that a [bank] treats as a covered position under [the market risk rule] for which there is a counterparty credit risk capital requirement;
(4) A sale of corporate loans by a [bank] to a third party in which the [bank] retains full recourse;
(5) An OTC derivative contract entered into by a [bank] with a company;
(6) An exposure to an individual that is not managed by a [bank] as part of a segment of exposures with homogeneous risk characteristics; and
(7) A commercial lease.
(a) Except as modified by paragraph (c) of this section or by section 23 of this appendix, each [bank] must meet a minimum ratio of:
(1) Total qualifying capital to total risk-weighted assets of 8.0 percent; and
(2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
(b) Each [bank] must hold capital commensurate with the level and nature of all risks to which the [bank] is exposed.
(c) When a [bank] subject to [the market risk rule] calculates its risk-based capital requirements under this appendix, the [bank] must also refer to [the market risk rule] for supplemental rules to calculate risk-based capital requirements adjusted for market risk.
(a)
(1) A [bank] is not required to deduct certain equity investments and CEIOs (as provided in section 12 of this appendix); and
(2) A [bank] also must make the deductions from capital required by paragraphs (b) and (c) of this section.
(b)
(c)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(a)
(b)
(a)
(2)
(b)
(a)
(2) A [bank] that elects to be subject to this appendix under paragraph (b)(2) of section 1 of this appendix must adopt a written implementation plan.
(b)
(i) Comprehensively address the qualification requirements in section 22 of this appendix for the [bank] and each consolidated subsidiary (U.S. and foreign-based) of the [bank] with respect to all portfolios and exposures of the [bank] and each of its consolidated subsidiaries;
(ii) Justify and support any proposed temporary or permanent exclusion of business lines, portfolios, or exposures from application of the advanced approaches in this appendix (which business lines, portfolios, and exposures must be, in the aggregate, immaterial to the [bank]);
(iii) Include the [bank]'s self-assessment of:
(A) The [bank]'s current status in meeting the qualification requirements in section 22 of this appendix; and
(B) The consistency of the [bank]'s current practices with the [AGENCY]'s supervisory guidance on the qualification requirements;
(iv) Based on the [bank]'s self-assessment, identify and describe the areas in which the [bank] proposes to undertake additional work to comply with the qualification requirements in section 22 of this appendix or to improve the consistency of the [bank]'s current practices with the [AGENCY]'s supervisory guidance on the qualification requirements (gap analysis);
(v) Describe what specific actions the [bank] will take to address the areas identified in the gap analysis required by paragraph (b)(1)(iv) of this section;
(vi) Identify objective, measurable milestones, including delivery dates and a date when the [bank]'s implementation of the methodologies described in this appendix will be fully operational;
(vii) Describe resources that have been budgeted and are available to implement the plan; and
(viii) Receive approval of the [bank]'s board of directors.
(2) The [bank] must submit the implementation plan, together with a copy of the minutes of the board of directors' approval, to the [AGENCY] at least 60 days before the [bank] proposes to begin its parallel run, unless the [AGENCY] waives prior notice.
(c)
(d)
(1) The [bank] fully complies with all the qualification requirements in section 22 of this appendix;
(2) The [bank] has conducted a satisfactory parallel run under paragraph (c) of this section; and
(3) The [bank] has an adequate process to ensure ongoing compliance with the qualification requirements in section 22 of this appendix.
(e)
(1)
(A) The [bank]'s floor-adjusted tier 1 risk-based capital ratio; or
(B) The [bank]'s advanced approaches tier 1 risk-based capital ratio.
(ii)
(A) The [bank]'s floor-adjusted total risk-based capital ratio; or
(B) The [bank]'s advanced approaches total risk-based capital ratio.
(2)
(A) The [bank]'s total risk-weighted assets as calculated under [the general risk-based capital rules]; and
(B) The appropriate transitional floor percentage in Table 1.
(ii) A [bank]'s floor-adjusted total risk-based capital ratio during a transitional floor period is equal to the sum of the [bank]'s tier 1 and tier 2 capital as calculated under [the general risk-based capital rules], divided by the product of:
(A) The [bank]'s total risk-weighted assets as calculated under [the general risk-based capital rules]; and
(B) The appropriate transitional floor percentage in Table 1.
(iii) A [bank] that meets the criteria in paragraph (b)(1) or (b)(2) of section 1 of this appendix as of April 1, 2008, must use [the general risk-based capital rules] during the parallel run and as the basis for its transitional floors.
(3)
(ii) A [bank]'s advanced approaches total risk-based capital ratio equals the [bank]'s total risk-based capital ratio as calculated under this appendix (other than this section on transitional floor periods).
(4)
(5)
(6)
(a)
(2) The systems and processes used by a [bank] for risk-based capital purposes under this appendix must be consistent with the [bank]'s internal risk management processes and management information reporting systems.
(3) Each [bank] must have an appropriate infrastructure with risk measurement and management processes that meet the qualification requirements of this section and are appropriate given the [bank]'s size and level of complexity. Regardless of whether the systems and models that generate the risk parameters necessary for calculating a [bank]'s risk-based capital requirements are located at any affiliate of the [bank], the [bank] itself must ensure that the risk parameters and reference data used to determine its risk-based capital requirements are representative of its own credit risk and operational risk exposures.
(b)
(2) For wholesale exposures:
(i) A [bank] must have an internal risk rating system that accurately and reliably assigns each obligor to a single rating grade (reflecting the obligor's likelihood of default). A [bank] may elect, however, not to assign to a rating grade an obligor to whom the [bank] extends credit based solely on the financial strength of a guarantor, provided that all of the [bank]'s exposures to the obligor are fully covered by eligible guarantees, the [bank] applies the PD substitution approach in paragraph (c)(1) of section 33 of this appendix to all exposures to that obligor, and the [bank] immediately assigns the obligor to a rating grade if a guarantee can no longer be recognized under this appendix. The [bank]'s wholesale obligor rating system must have at least seven discrete rating grades for non-defaulted obligors and at least one rating grade for defaulted obligors.
(ii) Unless the [bank] has chosen to directly assign LGD estimates to each wholesale exposure, the [bank] must have an internal risk rating system that accurately and reliably assigns each wholesale exposure to a loss severity rating grade (reflecting the [bank]'s estimate of the LGD of the exposure). A [bank] employing loss severity rating grades must have a sufficiently granular loss severity grading system to avoid grouping together exposures with widely ranging LGDs.
(3) For retail exposures, a [bank] must have an internal system that groups retail exposures into the appropriate retail exposure subcategory, groups the retail exposures in each retail exposure subcategory into separate segments with homogeneous risk characteristics, and assigns accurate and reliable PD and LGD estimates for each segment on a consistent basis. The [bank]'s system must identify and group in separate segments by subcategories exposures identified in paragraphs (c)(2)(ii) and (iii) of section 31 of this appendix.
(4) The [bank]'s internal risk rating policy for wholesale exposures must describe the [bank]'s rating philosophy (that is, must describe how wholesale obligor rating assignments are affected by the [bank]'s choice of the range of economic, business, and industry conditions that are considered in the obligor rating process).
(5) The [bank]'s internal risk rating system for wholesale exposures must provide for the review and update (as appropriate) of each obligor rating and (if applicable) each loss severity rating whenever the [bank] receives new material information, but no less frequently than annually. The [bank]'s retail exposure segmentation system must provide for the review and update (as appropriate) of assignments of retail exposures to segments whenever the [bank] receives new material information, but generally no less frequently than quarterly.
(c)
(2) Data used to estimate the risk parameters must be relevant to the [bank]'s actual wholesale and retail exposures, and of sufficient quality to support the determination of risk-based capital requirements for the exposures.
(3) The [bank]'s risk parameter quantification process must produce appropriately conservative risk parameter estimates where the [bank] has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates.
(4) The [bank]'s risk parameter estimation process should not rely on the possibility of U.S. government financial assistance, except for the financial assistance that the U.S. government has a legally binding commitment to provide.
(5) Where the [bank]'s quantifications of LGD directly or indirectly incorporate estimates of the effectiveness of its credit risk management practices in reducing its exposure to troubled obligors prior to default, the [bank] must support such estimates with empirical analysis showing that the estimates are consistent with its historical experience in dealing with such exposures during economic downturn conditions.
(6) PD estimates for wholesale obligors and retail segments must be based on at least five years of default data. LGD estimates for wholesale exposures must be based on at least seven years of loss severity data, and LGD estimates for retail segments must be based on at least five years of loss severity data. EAD estimates for wholesale exposures must be based on at least seven years of exposure amount data, and EAD estimates for retail segments must be based on at least five years of exposure amount data.
(7) Default, loss severity, and exposure amount data must include periods of economic downturn conditions, or the [bank] must adjust its estimates of risk parameters to compensate for the lack of data from periods of economic downturn conditions.
(8) The [bank]'s PD, LGD, and EAD estimates must be based on the definition of default in this appendix.
(9) The [bank] must review and update (as appropriate) its risk parameters and its risk parameter quantification process at least annually.
(10) The [bank] must at least annually conduct a comprehensive review and analysis of reference data to determine relevance of reference data to the [bank]'s exposures, quality of reference data to support PD, LGD, and EAD estimates, and consistency of reference data to the definition of default contained in this appendix.
(d)
(e)
(f)
(g)
(h)
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
(B) Is responsible for designing, implementing, and overseeing the [bank]'s operational risk data and assessment systems, operational risk quantification systems, and related processes;
(ii) Have and document a process (which must capture business environment and internal control factors affecting the [bank]'s operational risk profile) to identify, measure, monitor, and control operational risk in [bank] products, activities, processes, and systems; and
(iii) Report operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and the
(2)
(i) Be structured in a manner consistent with the [bank]'s current business activities, risk profile, technological processes, and risk management processes; and
(ii) Include credible, transparent, systematic, and verifiable processes that incorporate the following elements on an ongoing basis:
(A)
(
(
(
(B)
(C)
(D)
(3)
(A) Must generate estimates of the [bank]'s operational risk exposure using its operational risk data and assessment systems;
(B) Must employ a unit of measure that is appropriate for the [bank]'s range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution;
(C) Must include a credible, transparent, systematic, and verifiable approach for weighting each of the four elements, described in paragraph (h)(2)(ii) of this section, that a [bank] is required to incorporate into its operational risk data and assessment systems;
(D) May use internal estimates of dependence among operational losses across and within units of measure if the [bank] can demonstrate to the satisfaction of the [AGENCY] that its process for estimating dependence is sound, robust to a variety of scenarios, and implemented with integrity, and allows for the uncertainty surrounding the estimates. If the [bank] has not made such a demonstration, it must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure; and
(E) Must be reviewed and updated (as appropriate) whenever the [bank] becomes aware of information that may have a material effect on the [bank]'s estimate of operational risk exposure, but the review and update must occur no less frequently than annually.
(ii) With the prior written approval of the [AGENCY], a [bank] may generate an estimate of its operational risk exposure using an alternative approach to that specified in paragraph (h)(3)(i) of this section. A [bank] proposing to use such an alternative operational risk quantification system must submit a proposal to the [AGENCY]. In determining whether to approve a [bank]'s proposal to use an alternative operational risk quantification system, the [AGENCY] will consider the following principles:
(A) Use of the alternative operational risk quantification system will be allowed only on an exception basis, considering the size, complexity, and risk profile of the [bank];
(B) The [bank] must demonstrate that its estimate of its operational risk exposure generated under the alternative operational risk quantification system is appropriate and can be supported empirically; and
(C) A [bank] must not use an allocation of operational risk capital requirements that includes entities other than depository institutions or the benefits of diversification across entities.
(i)
(2) A [bank] must retain data using an electronic format that allows timely retrieval of data for analysis, validation, reporting, and disclosure purposes.
(3) A [bank] must retain sufficient data elements related to key risk drivers to permit adequate monitoring, validation, and refinement of its advanced systems.
(j)
(2) The [bank]'s board of directors (or a designated committee of the board) must at least annually review the effectiveness of, and approve, the [bank]'s advanced systems.
(3) A [bank] must have an effective system of controls and oversight that:
(i) Ensures ongoing compliance with the qualification requirements in this section;
(ii) Maintains the integrity, reliability, and accuracy of the [bank]'s advanced systems; and
(iii) Includes adequate governance and project management processes.
(4) The [bank] must validate, on an ongoing basis, its advanced systems. The [bank]'s validation process must be independent of the advanced systems' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the advanced systems;
(ii) An ongoing monitoring process that includes verification of processes and benchmarking; and
(iii) An outcomes analysis process that includes back-testing.
(5) The [bank] must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the [bank]'s advanced systems and reports its findings to the [bank]'s board of directors (or a committee thereof).
(6) The [bank] must periodically stress test its advanced systems. The stress testing must include a consideration of how economic cycles, especially downturns, affect risk-based capital requirements (including migration across rating grades and segments and the credit risk mitigation benefits of double default treatment).
(k)
(a)
(b)
(2) The [bank] must establish and submit a plan satisfactory to the [AGENCY] to return to compliance with the qualification requirements.
(3) In addition, if the [AGENCY] determines that the [bank]'s risk-based capital requirements are not commensurate with the [bank]'s credit, market, operational, or other risks, the [AGENCY] may require such a [bank] to calculate its risk-based capital requirements:
(i) Under [the general risk-based capital rules]; or
(ii) Under this appendix with any modifications provided by the [AGENCY].
(a)
(b)
(2) If the acquiring [bank] is not subject to the advanced approaches in this appendix at the time of acquisition or merger, during the period when [the general risk-based capital rules] apply to the acquiring [bank], the ALLL associated with the exposures of the merged or acquired company may not be directly included in tier 2 capital. Rather, any excess eligible credit reserves associated with the merged or acquired company's exposures may be included in the [bank]'s tier 2 capital up to 0.6 percent of the credit-risk-weighted assets associated with those exposures.
(a)
(1) Phase 1—categorization of exposures;
(2) Phase 2—assignment of wholesale obligors and exposures to rating grades and segmentation of retail exposures;
(3) Phase 3—assignment of risk parameters to wholesale exposures and segments of retail exposures; and
(4) Phase 4—calculation of risk-weighted asset amounts.
(b)
(c)
(i) The [bank] must assign each obligor of a wholesale exposure to a single obligor rating grade and must assign each wholesale exposure to which it does not directly assign an LGD estimate to a loss severity rating grade.
(ii) The [bank] must identify which of its wholesale obligors are in default.
(2)
(ii) The [bank] must identify which of its retail exposures are in default. The [bank] must segment defaulted retail exposures separately from non-defaulted retail exposures.
(iii) If the [bank] determines the EAD for eligible margin loans using the approach in paragraph (b) of section 32 of this appendix, the [bank] must identify which of its retail exposures are eligible margin loans for which the [bank] uses this EAD approach and must segment such eligible margin loans separately from other retail exposures.
(3)
(d)
(i) Associate a PD with each wholesale obligor rating grade;
(ii) Associate an LGD with each wholesale loss severity rating grade or assign an LGD to each wholesale exposure;
(iii) Assign an EAD and M to each wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
(2)
(3)
(4)
(5)
(ii) A [bank] may take into account the risk reducing effects of guarantees and credit derivatives in support of retail exposures in a segment when quantifying the PD and LGD of the segment.
(iii) Except as provided in paragraph (d)(6) of this section, a [bank] may take into account the risk reducing effects of collateral in support of a wholesale exposure when quantifying the LGD of the exposure and may
(6)
(ii) A [bank] may attribute an EAD of zero to:
(A) Derivative contracts that are publicly traded on an exchange that requires the daily receipt and payment of cash-variation margin;
(B) Derivative contracts and repo-style transactions that are outstanding with a qualifying central counterparty (but not for those transactions that a qualifying central counterparty has rejected); and
(C) Credit risk exposures to a qualifying central counterparty in the form of clearing deposits and posted collateral that arise from transactions described in paragraph (d)(6)(ii)(B) of this section.
(7)
(i) Has a legal and practical ability not to renew or roll over the exposure in the event of credit deterioration of the obligor;
(ii) Makes an independent credit decision at the inception of the exposure and at every renewal or roll over; and
(iii) Has no substantial commercial incentive to continue its credit relationship with the obligor in the event of credit deterioration of the obligor.
(e)
(ii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a non-defaulted obligor and segment of non-defaulted retail exposures calculated in paragraph (e)(1)(i) of this section and in paragraph (e) of section 34 of this appendix equals the total dollar risk-based capital requirement for those exposures and segments.
(iii) The aggregate risk-weighted asset amount for wholesale exposures to non-defaulted obligors and segments of non-defaulted retail exposures equals the total dollar risk-based capital requirement calculated in paragraph (e)(1)(ii) of this section multiplied by 12.5.
(2)
(ii) The dollar risk-based capital requirement for a segment of defaulted retail exposures equals 0.08 multiplied by the EAD of the segment.
(iii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a defaulted obligor calculated in paragraph (e)(2)(i) of this section plus the dollar risk-based capital requirements for each segment of defaulted retail exposures calculated in paragraph (e)(2)(ii) of this section equals the total dollar risk-based capital requirement for those exposures and segments.
(iv) The aggregate risk-weighted asset amount for wholesale exposures to defaulted obligors and segments of defaulted retail exposures equals the total dollar risk-based capital requirement calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
(3)
(ii) The risk-weighted asset amount for the residual value of a retail lease exposure equals such residual value.
(iii) The risk-weighted asset amount for any other on-balance-sheet asset that does not meet the definition of a wholesale, retail, securitization, or equity exposure equals the carrying value of the asset.
(4)
(a)
(2) This section also describes the methodology for calculating EAD for an OTC derivative contract or a set of OTC derivative contracts subject to a qualifying master netting agreement. A [bank] also may use the internal models methodology to estimate EAD for qualifying cross-product master netting agreements.
(3) A [bank] may only use the standard supervisory haircut approach with a minimum 10-business-day holding period to recognize in EAD the benefits of conforming residential mortgage collateral that secures repo-style transactions (other than repo-style transactions included in the [bank]'s VaR-based measure under [the market risk rule]), eligible margin loans, and OTC derivative contracts.
(4) A [bank] may use any combination of the three methodologies for collateral recognition; however, it must use the same methodology for similar exposures.
(b)
(i) The collateral haircut approach described in paragraph (b)(2) of this section;
(ii) For netting sets only, the simple VaR methodology described in paragraph (b)(3) of this section; or
(iii) The internal models methodology described in paragraph (d) of this section.
(2)
(A) ΣE equals the value of the exposure (the sum of the current market values of all instruments, gold, and cash the [bank] has lent, sold subject to repurchase, or posted as collateral to the counterparty under the transaction (or netting set));
(B) ΣC equals the value of the collateral (the sum of the current market values of all instruments, gold, and cash the [bank] has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction (or netting set));
(C) Es equals the absolute value of the net position in a given instrument or in gold (where the net position in a given instrument or in gold equals the sum of the current market values of the instrument or gold the [bank] has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current market values of that same instrument or gold the [bank] has borrowed, purchased subject to resale, or taken as collateral from the counterparty);
(D) Hs equals the market price volatility haircut appropriate to the instrument or gold referenced in Es;
(E) Efx equals the absolute value of the net position of instruments and cash in a currency that is different from the settlement currency (where the net position in a given currency equals the sum of the current market values of any instruments or cash in the currency the [bank] has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current market values of any instruments or cash in the currency the [bank] has borrowed, purchased subject to resale, or taken as collateral from the counterparty); and
(F) Hfx equals the haircut appropriate to the mismatch between the currency referenced in Efx and the settlement currency.
(ii)
(
(
(
(
(iii)
(A) To receive [AGENCY] approval to use its own internal estimates, a [bank] must satisfy the following minimum quantitative standards:
(
(
(
(
(
(B) With respect to debt securities that have an applicable external rating of investment grade, a [bank] may calculate haircuts for categories of securities. For a category of securities, the [bank] must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the [bank] has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the [bank] must at a minimum take into account:
(
(
(
(
(C) With respect to debt securities that have an applicable external rating of below investment grade and equity securities, a [bank] must calculate a separate haircut for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the [bank] must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency.
(E) A [bank]'s own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set).
(3)
(i) ΣE equals the value of the exposure (the sum of the current market values of all instruments, gold, and cash the [bank] has lent, sold subject to repurchase, or posted as collateral to the counterparty under the netting set);
(ii) ΣC equals the value of the collateral (the sum of the current market values of all instruments, gold, and cash the [bank] has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the [bank]'s empirically based best estimate of the 99th percentile, one-tailed confidence interval for an increase in the value of (ΣE—ΣC) over a five-business-day holding period for repo-style transactions or over a ten-business-day holding period for eligible margin loans using a minimum one-year historical observation period of price data representing the instruments that the [bank] has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. The [bank] must validate its VaR model, including by establishing and maintaining a rigorous and regular back-testing regime.
(c)
(2) A [bank] must determine the EAD for multiple OTC derivative contracts that are subject to a qualifying master netting agreement using the current exposure methodology in paragraph (c)(6) of this section or using the internal models methodology described in paragraph (d) of this section.
(3)
(ii) A [bank] that is the protection provider in a credit derivative must treat the credit derivative as a wholesale exposure to the reference obligor and need not compute a counterparty credit risk capital requirement for the credit derivative under this section, so long as it does so consistently for all such credit derivatives and either includes all or excludes all such credit derivatives that are subject to a master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes (unless the [bank] is treating the credit derivative as a covered position under [the
(4)
(5)
(i)
(ii)
(6)
(i)
(A) The net sum of all positive and negative mark-to-market values of the individual OTC derivative contracts subject to the qualifying master netting agreement; or
(B) zero.
(ii)
(A) Agross = the gross PFE (that is, the sum of the PFE amounts (as determined under paragraph (c)(5)(ii) of this section) for each individual OTC derivative contract subject to the qualifying master netting agreement); and
(B) NGR = the net to gross ratio (that is, the ratio of the net current credit exposure to the gross current credit exposure). In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (c)(5)(i) of this section) of all individual OTC derivative contracts subject to the qualifying master netting agreement.
(7)
(d)
(i) The [bank] effectively integrates the risk mitigating effects of cross-product netting into its risk management and other information technology systems; and
(ii) The [bank] obtains the prior written approval of the [AGENCY]. A [bank] that uses the internal models methodology for a transaction type must receive approval from the [AGENCY] to cease using the methodology for that transaction type or to make a material change to its internal model.
(2) Under the internal models methodology, a [bank] uses an internal model to estimate the expected exposure (EE) for a netting set and then calculates EAD based on that EE.
(i) The [bank] must use its internal model's probability distribution for changes in the market value of a netting set that are attributable to changes in market variables to determine EE.
(ii) Under the internal models methodology, EAD = α x effective EPE, or, subject to [AGENCY] approval as provided in paragraph (d)(7), a more conservative measure of EAD.
(
(
(B) α = 1.4 except as provided in paragraph (d)(6), or when the [AGENCY] has determined that the [bank] must set α higher based on the [bank]'s specific characteristics of counterparty credit risk.
(iii) A [bank] may include financial collateral currently posted by the counterparty as collateral (but may not include other forms of collateral) when calculating EE.
(iv) If a [bank] hedges some or all of the counterparty credit risk associated with a netting set using an eligible credit derivative, the [bank] may take the reduction in exposure to the counterparty into account when estimating EE. If the [bank] recognizes this reduction in exposure to the counterparty in its estimate of EE, it must also use its internal model to estimate a separate EAD for the [bank]'s exposure to the protection provider of the credit derivative.
(3) To obtain [AGENCY] approval to calculate the distributions of exposures upon which the EAD calculation is based, the [bank] must demonstrate to the satisfaction of the [AGENCY] that it has been using for at least one year an internal model that broadly meets the following minimum standards, with which the [bank] must maintain compliance:
(i) The model must have the systems capability to estimate the expected exposure to the counterparty on a daily basis (but is not expected to estimate or report expected exposure on a daily basis).
(ii) The model must estimate expected exposure at enough future dates to reflect accurately all the future cash flows of contracts in the netting set.
(iii) The model must account for the possible non-normality of the exposure distribution, where appropriate.
(iv) The [bank] must measure, monitor, and control current counterparty exposure and the exposure to the counterparty over the whole life of all contracts in the netting set.
(v) The [bank] must be able to measure and manage current exposures gross and net of collateral held, where appropriate. The [bank] must estimate expected exposures for OTC derivative contracts both with and without the effect of collateral agreements.
(vi) The [bank] must have procedures to identify, monitor, and control specific wrong-way risk throughout the life of an exposure. Wrong-way risk in this context is the risk that future exposure to a counterparty will be high when the counterparty's probability of default is also high.
(vii) The model must use current market data to compute current exposures. When estimating model parameters based on historical data, at least three years of historical data that cover a wide range of economic conditions must be used and must be updated quarterly or more frequently if market conditions warrant. The [bank] should consider using model parameters based on forward-looking measures, where appropriate.
(viii) A [bank] must subject its internal model to an initial validation and annual model review process. The model review should consider whether the inputs and risk factors, as well as the model outputs, are appropriate.
(4)
(B) df
(C) Δ
(ii) If the remaining maturity of the exposure or the longest-dated contract in the netting set is one year or less, the [bank] must set M for the exposure or netting set equal to one year, except as provided in paragraph (d)(7) of section 31 of this appendix.
(5)
(i) With prior written approval from the [AGENCY], a [bank] may include the effect of a collateral agreement within its internal model used to calculate EAD. The [bank] may set EAD equal to the expected exposure at the end of the margin period of risk. The margin period of risk means, with respect to a netting set subject to a collateral agreement, the time period from the most recent exchange of collateral with a counterparty until the next required exchange of collateral plus the period of time required to sell and realize the proceeds of the least liquid collateral that can be delivered under the terms of the collateral agreement and, where applicable, the period of time required to re-hedge the resulting market risk, upon the default of the counterparty. The minimum margin period of risk is five business days for repo-style transactions and ten business days for other transactions when liquid financial collateral is posted under a daily margin maintenance requirement. This period should be extended to cover any additional time between margin calls; any potential closeout difficulties; any delays in selling collateral, particularly if the collateral is illiquid; and any impediments to prompt re-hedging of any market risk.
(ii) A [bank] that can model EPE without collateral agreements but cannot achieve the higher level of modeling sophistication to model EPE with collateral agreements can set effective EPE for a collateralized netting set equal to the lesser of:
(A) The threshold, defined as the exposure amount at which the counterparty is required to post collateral under the collateral agreement, if the threshold is positive, plus an add-on that reflects the potential increase in exposure of the netting set over the margin period of risk. The add-on is computed as the
(B) Effective EPE without a collateral agreement.
(6)
(i) The [bank]'s own estimate of alpha must capture in the numerator the effects of:
(A) The material sources of stochastic dependency of distributions of market values of transactions or portfolios of transactions across counterparties;
(B) Volatilities and correlations of market risk factors used in the joint simulation, which must be related to the credit risk factor used in the simulation to reflect potential increases in volatility or correlation in an economic downturn, where appropriate; and
(C) The granularity of exposures (that is, the effect of a concentration in the proportion of each counterparty's exposure that is driven by a particular risk factor).
(ii) The [bank] must assess the potential model uncertainty in its estimates of alpha.
(iii) The [bank] must calculate the numerator and denominator of alpha in a consistent fashion with respect to modeling methodology, parameter specifications, and portfolio composition.
(iv) The [bank] must review and adjust as appropriate its estimates of the numerator and denominator of alpha on at least a quarterly basis and more frequently when the composition of the portfolio varies over time.
(7)
(a)
(i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the [bank] and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative.
(2) Wholesale exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) are securitization exposures subject to the securitization framework in part V.
(3) A [bank] may elect to recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative covering an exposure described in paragraph (a)(1) of this section by using the PD substitution approach or the LGD adjustment approach in paragraph (c) of this section or, if the transaction qualifies, using the double default treatment in section 34 of this appendix. A [bank]'s PD and LGD for the hedged exposure may not be lower than the PD and LGD floors described in paragraphs (d)(2) and (d)(3) of section 31 of this appendix.
(4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in paragraph (a)(1) of this section, a [bank] may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-based capital requirement for each separate exposure as described in paragraph (a)(3) of this section.
(5) If a single eligible guarantee or eligible credit derivative covers multiple hedged wholesale exposures described in paragraph (a)(1) of this section, a [bank] must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-based capital requirement for each exposure as described in paragraph (a)(3) of this section.
(6) A [bank] must use the same risk parameters for calculating ECL as it uses for calculating the risk-based capital requirement for the exposure.
(b)
(2) A [bank] may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu (that is, equally) with or is junior to the hedged exposure; and
(ii) The reference exposure and the hedged exposure are exposures to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to assure payments under the credit derivative are triggered when the obligor fails to pay under the terms of the hedged exposure.
(c)
(ii)
(A) The [bank] must calculate its risk-based capital requirement for the protected exposure under section 31 of this appendix, where PD is the protection provider's PD, LGD is determined under paragraph (c)(1)(iii) of this section, and EAD is P. If the [bank] determines that full substitution leads to an inappropriate degree of risk mitigation, the [bank] may use a higher PD than that of the protection provider.
(B) The [bank] must calculate its risk-based capital requirement for the unprotected exposure under section 31 of this appendix, where PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P.
(C) The treatment in this paragraph (c)(1)(ii) is applicable when the credit risk of a wholesale exposure is covered on a partial pro rata basis or when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraph (d), (e), or (f) of this section.
(iii)
(A) The lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative, if the guarantee or credit derivative provides the [bank] with the option to receive immediate payout upon triggering the protection; or
(B) The LGD of the guarantee or credit derivative, if the guarantee or credit
(2)
(A) The risk-based capital requirement for the exposure as calculated under section 31 of this appendix, with the LGD of the exposure adjusted to reflect the guarantee or credit derivative; or
(B) The risk-based capital requirement for a direct exposure to the protection provider as calculated under section 31 of this appendix, using the PD for the protection provider, the LGD for the guarantee or credit derivative, and an EAD equal to the EAD of the hedged exposure.
(ii)
(A) The [bank]'s risk-based capital requirement for the protected exposure would be the greater of:
(
(
(B) The [bank] must calculate its risk-based capital requirement for the unprotected exposure under section 31 of this appendix, where PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P.
(3)
(d)
(2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligor is scheduled to fulfill its obligation on the exposure. If a credit risk mitigant has embedded options that may reduce its term, the [bank] (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the [bank] (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the [bank] to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of protection increases over time even if credit quality remains the same or improves, the residual maturity of the credit risk mitigant will be the remaining time to the first call.
(4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the [bank] must apply the following adjustment to the effective notional amount of the credit risk mitigant: Pm = E × (t - 0.25)/(T - 0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant, adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years.
(e)
(1) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring event (and maturity mismatch, if applicable); and
(2) Pm = effective notional amount of the credit risk mitigant adjusted for maturity mismatch (if applicable).
(f)
(i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring event, if applicable); and
(iii) H
(2) A [bank] must set H
(i) The own-estimates haircuts in paragraph (b)(2)(iii) of section 32 of this appendix;
(ii) The simple VaR methodology in paragraph (b)(3) of section 32 of this appendix; or
(iii) The internal models methodology in paragraph (d) of section 32 of this appendix.
(3) A [bank] must adjust H
(a)
(1) The hedged exposure is fully covered or covered on a pro rata basis by:
(i) An eligible guarantee issued by an eligible double default guarantor; or
(ii) An eligible credit derivative that meets the requirements of paragraph (b)(2) of section 33 of this appendix and is issued by an eligible double default guarantor.
(2) The guarantee or credit derivative is:
(i) An uncollateralized guarantee or uncollateralized credit derivative (for example, a credit default swap) that provides protection with respect to a single reference obligor; or
(ii) An nth-to-default credit derivative (subject to the requirements of paragraph (m) of section 42 of this appendix).
(3) The hedged exposure is a wholesale exposure (other than a sovereign exposure).
(4) The obligor of the hedged exposure is not:
(i) An eligible double default guarantor or an affiliate of an eligible double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The [bank] does not recognize any credit risk mitigation benefits of the guarantee or credit derivative for the hedged exposure other than through application of the double default treatment as provided in this section.
(6) The [bank] has implemented a process (which has received the prior, written approval of the [AGENCY]) to detect excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. If excessive correlation is present, the [bank] may not use the double default treatment for the hedged exposure.
(b)
(c)
(1) For the protected exposure, the [bank] must set EAD equal to P and calculate its risk-weighted asset amount as provided in paragraph (e) of this section.
(2) For the unprotected exposure, the [bank] must set EAD equal to the EAD of the original exposure minus P and then calculate its risk-weighted asset amount as provided in section 31 of this appendix.
(d)
(e)
(a)
(1)
(2)
(3)
(4)
(b)
(1) Transactions accepted by a qualifying central counterparty that are subject to daily marking-to-market and daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions (which are addressed in sections 31 and 32 of this appendix);
(3) One-way cash payments on OTC derivative contracts (which are addressed in sections 31 and 32 of this appendix); or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts and addressed in sections 31 and 32 of this appendix).
(c)
(d)
(e)
(2) From the business day after the [bank] has made its delivery until five business days after the counterparty delivery is due, the [bank] must calculate its risk-based capital requirement for the transaction by treating the current market value of the deliverables owed to the [bank] as a wholesale exposure.
(i) A [bank] may assign an obligor rating to a counterparty for which it is not otherwise required under this appendix to assign an obligor rating on the basis of the applicable external rating of any outstanding unsecured long-term debt security without credit enhancement issued by the counterparty.
(ii) A [bank] may use a 45 percent LGD for the transaction rather than estimating LGD for the transaction provided the [bank] uses the 45 percent LGD for all transactions described in paragraphs (e)(1) and (e)(2) of this section.
(iii) A [bank] may use a 100 percent risk weight for the transaction provided the [bank] uses this risk weight for all transactions described in paragraphs (e)(1) and (e)(2) of this section.
(3) If the [bank] has not received its deliverables by the fifth business day after the counterparty delivery was due, the [bank] must deduct the current market value of the deliverables owed to the [bank] 50 percent from tier 1 capital and 50 percent from tier 2 capital.
(f)
(a)
(1) The transfer is considered a sale under GAAP;
(2) The [bank] has transferred to third parties credit risk associated with the underlying exposures; and
(3) Any clean-up calls relating to the securitization are eligible clean-up calls.
(b)
(1) The credit risk mitigant is financial collateral, an eligible credit derivative from an eligible securitization guarantor or an eligible guarantee from an eligible securitization guarantor;
(2) The [bank] transfers credit risk associated with the underlying exposures to third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the [bank] to alter or replace the underlying exposures to improve the credit quality of the pool of underlying exposures;
(iii) Increase the [bank]'s cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the [bank] in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the [bank] after the inception of the securitization;
(3) The [bank] obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(a)
(1) A [bank] must deduct from tier 1 capital any after-tax gain-on-sale resulting from a securitization and must deduct from total capital in accordance with paragraph (c) of this section the portion of any CEIO that does not constitute gain-on-sale.
(2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and qualifies for the Ratings-Based Approach in section 43 of this appendix, a [bank] must apply the Ratings-Based Approach to the exposure.
(3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and does not qualify for the Ratings-Based Approach, the [bank] may either apply the Internal Assessment Approach in section 44 of this appendix to the exposure (if the [bank], the exposure, and the relevant ABCP program qualify for the Internal Assessment Approach) or the Supervisory Formula Approach in section 45 of this appendix to the exposure (if the [bank] and the exposure qualify for the Supervisory Formula Approach).
(4) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and does not qualify for the Ratings-Based Approach, the Internal Assessment Approach, or the Supervisory Formula Approach, the [bank] must deduct the exposure from total capital in accordance with paragraph (c) of this section.
(5) If a securitization exposure is an OTC derivative contract (other than a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), with approval of the [AGENCY], a [bank] may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (e) of this section rather than apply the hierarchy of approaches described in paragraphs (a) (1) through (4) of this section.
(b)
(c)
(2) A [bank] may calculate any deduction from tier 1 capital and tier 2 capital for a securitization exposure net of any deferred tax liabilities associated with the securitization exposure.
(d)
(1) The [bank]'s total risk-based capital requirement for the underlying exposures as if the [bank] directly held the underlying exposures; and
(2) The total ECL of the underlying exposures.
(e)
(i) The [bank]'s carrying value minus any unrealized gains and plus any unrealized losses on the exposure, if the exposure is a security classified as available-for-sale; or
(ii) The [bank]'s carrying value, if the exposure is not a security classified as available-for-sale.
(2) The amount of an off-balance sheet securitization exposure that is not an OTC derivative contract (other than a credit derivative) is the notional amount of the exposure. For an off-balance-sheet securitization exposure to an ABCP program, such as a liquidity facility, the notional amount may be reduced to the maximum potential amount that the [bank] could be required to fund given the ABCP program's current underlying assets (calculated without regard to the current credit quality of those assets).
(3) The amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or OTC derivative contract (other than a credit derivative) is the EAD of the exposure as calculated in section 32 of this appendix.
(f)
(g)
(1) If the [bank] is an originating [bank], deduct from tier 1 capital any after-tax gain-on-sale resulting from the securitization and deduct from total capital in accordance with paragraph (c) of this section the portion of any CEIO that does not constitute gain-on-sale;
(2) If the securitization exposure does not require deduction under paragraph (g)(1), apply the RBA in section 43 of this appendix to the securitization exposure if the exposure qualifies for the RBA;
(3) If the securitization exposure does not require deduction under paragraph (g)(1) and does not qualify for the RBA, apply the IAA in section 44 of this appendix to the exposure (if the [bank], the exposure, and the relevant ABCP program qualify for the IAA); and
(4) If the securitization exposure does not require deduction under paragraph (g)(1) and does not qualify for the RBA or the IAA, deduct the exposure from total capital in accordance with paragraph (c) of this section.
(h)
(1) The [bank] must hold regulatory capital against all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from tier 1 capital any after-tax gain-on-sale resulting from the securitization; and
(2) The [bank] must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The regulatory capital impact to the [bank] of providing such implicit support.
(i)
(j)
(k)
(i) The transaction is a sale under GAAP.
(ii) The [bank] establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the [bank]'s reasonably estimated liability under the recourse arrangement.
(iii) The loans and leases are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632).
(iv) The [bank] is well capitalized, as defined in the [AGENCY]'s prompt corrective action regulation—12 CFR part 6 (for national banks), 12 CFR part 208, subpart D (for state member banks or bank holding companies), 12 CFR part 325, subpart B (for state nonmember banks), and 12 CFR part 565 (for savings associations). For purposes of determining whether a [bank] is well capitalized for purposes of this paragraph, the [bank]'s capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section.
(2) The total outstanding amount of recourse retained by a [bank] on transfers of small-business obligations receiving the capital treatment specified in paragraph (k)(1) of this section cannot exceed 15 percent of the [bank]'s total qualifying capital.
(3) If a [bank] ceases to be well capitalized or exceeds the 15 percent capital limitation, the preferential capital treatment specified in paragraph (k)(1) of this section will continue to apply to any transfers of small-business obligations with recourse that occurred during the time that the [bank] was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of the [bank] must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR part 3, Appendix A (for national banks), 12 CFR part 208, Appendix A (for state member banks), 12 CFR part 225, Appendix A (for bank holding companies), 12 CFR part 325, Appendix A (for state nonmember banks), and 12 CFR 567.6(b)(5)(v) (for savings associations).
(l)
(2) If a [bank] either is not permitted, or elects not, to exclude consolidated ABCP program assets from its risk-weighted assets, the [bank] must hold risk-based capital against the consolidated ABCP program assets in accordance with this appendix but is not required to hold risk-based capital against any securitization exposures of the [bank] to the ABCP program.
(m)
(ii)
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the individual underlying exposures, up to a maximum of 100 percent.
(2)
(
(
(B) If a [bank] satisfies the requirements of paragraph (m)(2)(i)(A) of this section, the [bank] must determine its risk-based capital requirement for the underlying exposures as if the [bank] had only synthetically securitized the underlying exposure with the n
(ii)
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the individual underlying exposures (excluding the n-1 underlying exposures with the lowest risk-based capital requirements), up to a maximum of 100 percent.
(a)
(2)
(b)
(2) A [bank] must apply the risk weights in Table 6 when the securitization exposure's applicable external or applicable inferred rating represents a long-term credit rating, and must apply the risk weights in Table 7 when the securitization exposure's applicable external or applicable inferred rating represents a short-term credit rating.
(i) A [bank] must apply the risk weights in column 1 of Table 6 or Table 7 to the securitization exposure if:
(A) N (as calculated under paragraph (e)(6) of section 45 of this appendix) is six or more (for purposes of this section only, if the notional number of underlying exposures is 25 or more or if all of the underlying exposures are retail exposures, a [bank] may assume that N is six or more unless the [bank] knows or has reason to know that N is less than six); and
(B) The securitization exposure is a senior securitization exposure.
(ii) A [bank] must apply the risk weights in column 3 of Table 6 or Table 7 to the securitization exposure if N is less than six, regardless of the seniority of the securitization exposure.
(iii) Otherwise, a [bank] must apply the risk weights in column 2 of Table 6 or Table 7.
(a)
(1)
(i) The [bank]'s internal credit assessments of securitization exposures must be based on publicly available rating criteria used by an NRSRO.
(ii) The [bank]'s internal credit assessments of securitization exposures used for risk-based capital purposes must be consistent with those used in the [bank]'s internal risk management process, management information reporting systems, and capital adequacy assessment process.
(iii) The [bank]'s internal credit assessment process must have sufficient granularity to identify gradations of risk. Each of the [bank]'s internal credit assessment categories must correspond to an external rating of an NRSRO.
(iv) The [bank]'s internal credit assessment process, particularly the stress test factors for determining credit enhancement requirements, must be at least as conservative as the most conservative of the publicly available rating criteria of the NRSROs that have provided external ratings to the commercial paper issued by the ABCP program.
(A) Where the commercial paper issued by an ABCP program has an external rating from
(B) If any NRSRO that provides an external rating to the ABCP program's commercial paper changes its methodology (including stress factors), the [bank] must evaluate whether to revise its internal assessment process.
(v) The [bank] must have an effective system of controls and oversight that ensures compliance with these operational requirements and maintains the integrity and accuracy of the internal credit assessments. The [bank] must have an internal audit function independent from the ABCP program business line and internal credit assessment process that assesses at least annually whether the controls over the internal credit assessment process function as intended.
(vi) The [bank] must review and update each internal credit assessment whenever new material information is available, but no less frequently than annually.
(vii) The [bank] must validate its internal credit assessment process on an ongoing basis and at least annually.
(2)
(3)
(i) The [bank] initially rated the exposure at least the equivalent of investment grade.
(ii) The ABCP program has robust credit and investment guidelines (that is, underwriting standards) for the exposures underlying the securitization exposure.
(iii) The ABCP program performs a detailed credit analysis of the sellers of the exposures underlying the securitization exposure.
(iv) The ABCP program's underwriting policy for the exposures underlying the securitization exposure establishes minimum asset eligibility criteria that include the prohibition of the purchase of assets that are significantly past due or of assets that are defaulted (that is, assets that have been charged off or written down by the seller prior to being placed into the ABCP program or assets that would be charged off or written down under the program's governing contracts), as well as limitations on concentration to individual obligors or geographic areas and the tenor of the assets to be purchased.
(v) The aggregate estimate of loss on the exposures underlying the securitization exposure considers all sources of potential risk, such as credit and dilution risk.
(vi) Where relevant, the ABCP program incorporates structural features into each purchase of exposures underlying the securitization exposure to mitigate potential credit deterioration of the underlying exposures. Such features may include wind-down triggers specific to a pool of underlying exposures.
(b)
(a)
(b)
(c)
(2) If K
(i) 0.0056 * T; or
(ii) S[L + T] − S[L].
(3) If K
(i) 0.0056 * (T − (K
(ii) S[L + T] − S[K
(d)
(11) In these expressions, β[Y; a, b] refers to the cumulative beta distribution with parameters a and b evaluated at Y. In the case where N = 1 and EWALGD = 100 percent, S[Y] in formula (1) must be calculated with K[Y] set equal to the product of K
(e)
(2)
(3)
(A) The sum of the risk-based capital requirements for the underlying exposures plus the expected credit losses of the underlying exposures (as determined under this appendix as if the underlying exposures were directly held by the [bank]); to
(B) UE.
(ii) The calculation of K
(iii) All assets related to the securitization are treated as underlying exposures, including assets in a reserve account (such as a cash collateral account).
(4)
(A) The amount of all securitization exposures subordinated to the tranche that contains the [bank]'s securitization exposure; to
(B) UE.
(ii) A [bank] must determine L before considering the effects of any tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO associated with the securitization may not be included in L.
(iv) Any reserve account funded by accumulated cash flows from the underlying exposures that is subordinated to the tranche that contains the [bank]'s securitization exposure may be included in the numerator and denominator of L to the extent cash has accumulated in the account. Unfunded reserve accounts (that is, reserve accounts that are to be funded from future cash flows from the underlying exposures) may not be included in the calculation of L.
(v) In some cases, the purchase price of receivables will reflect a discount that provides credit enhancement (for example, first loss protection) for all or certain tranches of the securitization. When this arises, L should be calculated inclusive of this discount if the discount provides credit enhancement for the securitization exposure.
(5)
(i) The amount of the tranche that contains the [bank]'s securitization exposure; to
(ii) UE.
(6)
(ii) Multiple exposures to one obligor must be treated as a single underlying exposure.
(iii) In the case of a re-securitization (that is, a securitization in which some or all of the underlying exposures are themselves securitization exposures), the [bank] must treat each underlying exposure as a single underlying exposure and must not look through to the originally securitized underlying exposures.
(7)
(f)
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in paragraphs (f)(3) and (f)(4) of this section, a [bank] may employ a simplified method for calculating N and EWALGD.
(3) If C
(i) C
(ii) The level of m is to be selected by the [bank].
(4) Alternatively, if only C
(a)
(b)
(i) SE* = max {0, [SE—C x (1−Hs−Hfx)]};
(ii) SE = the amount of the securitization exposure calculated under paragraph (e) of section 42 of this appendix;
(iii) C = the current market value of the collateral;
(iv) Hs = the haircut appropriate to the collateral type; and
(v) Hfx = the haircut appropriate for any currency mismatch between the collateral and the exposure.
(2)
(3)
(i) A [bank] must use the collateral type haircuts (Hs) in Table 3;
(ii) A [bank] must use a currency mismatch haircut (Hfx) of 8 percent if the exposure and the collateral are denominated in different currencies;
(iii) A [bank] must multiply the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) by the square root of 6.5 (which equals 2.549510); and
(iv) A [bank] must adjust the supervisory haircuts upward on the basis of a holding period longer than 65 business days where and as appropriate to take into account the illiquidity of the collateral.
(4)
(c)
(2)
(i) Calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure as described in paragraph (c)(3) of this section; and
(ii) Add the exposure's ECL to the [bank]'s total ECL.
(3)
(i)
(ii)
(A)
(B)
(
(4)
(a)
(i) Includes one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contains an early amortization provision.
(2) For securitizations described in paragraph (a)(1) of this section, an originating [bank] must calculate the risk-based capital requirement for the originating [bank]'s interest under sections 42-45 of this appendix, and the risk-based capital requirement for the investors' interest under paragraph (b) of this section.
(b)
(1) The investors' interest EAD;
(2) The appropriate conversion factor in paragraph (c) of this section;
(3) K
(4) 12.5; and
(5) The proportion of the underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit.
(c)
(ii) To find the appropriate conversion factor in the tables, a [bank] must divide the three-month average annualized excess spread of the securitization by the excess spread trapping point in the securitization structure. In securitizations that do not require excess spread to be trapped, or that specify trapping points based primarily on performance measures other than the three-month average annualized excess spread, the excess spread trapping point is 4.5 percent.
(2) For a securitization for which all or substantially all of the underlying exposures are residential mortgage exposures, a [bank] may calculate the appropriate conversion factor using paragraph (c)(1) of this section or may use a conversion factor of 10 percent. If the [bank] chooses to use a conversion factor of 10 percent, it must use that conversion factor for all securitizations for which all or substantially all of the underlying exposures are residential mortgage exposures.
(a)
(b)
(1) For the on-balance sheet component of an equity exposure, the [bank]'s carrying value of the exposure reduced by any unrealized gains on the exposure that are reflected in such carrying value but excluded from the [bank]'s tier 1 and tier 2 capital; and
(2) For the off-balance sheet component of an equity exposure, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) for a given small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section. For unfunded equity commitments that are unconditional, the effective notional principal amount is the notional amount of the commitment. For unfunded equity commitments that are conditional, the effective notional principal amount is the [bank]'s best estimate of the amount that would be funded under economic downturn conditions.
(a)
(b)
(1)
(2)
(3)
(i)
(ii)
(iii)
(A) To compute the aggregate adjusted carrying value of a [bank]'s equity exposures for purposes of this paragraph (b)(3)(iii), the [bank] may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a [bank] does not know the actual holdings of the investment fund, the [bank] may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the [bank] must assume for purposes of this paragraph (b)(3)(iii) that the investment fund invests to the maximum extent possible in equity exposures.
(B) When determining which of a [bank]'s equity exposures qualify for a 100 percent risk weight under this paragraph, a [bank] first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682), then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
(4)
(5)
(6)
(i) Would meet the definition of a traditional securitization were it not for the [AGENCY]'s application of paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage is assigned a 600 percent risk weight.
(c)
(2)
(i) Under the dollar-offset method of measuring effectiveness, the [bank] must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the periodic changes in value of one equity exposure to the cumulative sum of the periodic changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals 0. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring effectiveness:
(iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then the value of E is zero.
(3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(a)
(b)
(1) The [bank] must have one or more models that:
(i) Assess the potential decline in value of its modeled equity exposures;
(ii) Are commensurate with the size, complexity, and composition of the [bank]'s modeled equity exposures; and
(iii) Adequately capture both general market risk and idiosyncratic risk.
(2) The [bank]'s model must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99.0 percent, one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the [bank]'s modeled equity exposures using a long-term sample period.
(3) The number of risk factors and exposures in the sample and the data period used for quantification in the [bank]'s model and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the [bank]'s estimates.
(4) The [bank]'s model and benchmarking process must incorporate data that are relevant in representing the risk profile of the [bank]'s modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the [bank]'s modeled equity exposures. In addition, the [bank]'s benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the [bank]'s model uses a scenario methodology, the [bank] must demonstrate that the model produces a conservative estimate of potential losses on the [bank]'s modeled equity exposures over a relevant long-term market cycle. If the [bank] employs risk factor models, the [bank] must demonstrate through empirical analysis the appropriateness of the risk factors used.
(5) The [bank] must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the [bank]'s modeled equity exposures and that the [bank] has made appropriate adjustments for differences. The [bank] must derive any proxies for its modeled equity exposures and benchmark portfolio using historical market data that are relevant to the [bank]'s modeled equity exposures and benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the [bank]'s modeled equity exposures.
(c)
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under section 52 of this appendix) and each equity exposure to an investment fund (as determined under section 54 of this appendix); and
(2) The greater of:
(i) The estimate of potential losses on the [bank]'s equity exposures (other than equity exposures referenced in paragraph (c)(1) of this section) generated by the [bank]'s internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the [bank]'s publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of this appendix, and are not equity exposures to an investment fund;
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs; and
(C) 300 percent multiplied by the aggregate adjusted carrying value of the [bank]'s equity exposures that are not publicly traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of this appendix, and are not equity exposures to an investment fund.
(d)
(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under section 52 of this appendix), each equity exposure that qualifies for a 400 percent risk weight under paragraph (b)(5) of section 52 or a 600 percent risk weight under paragraph (b)(6) of section 52 (as determined under section 52 of this appendix), and each equity exposure to an investment fund (as determined under section 54 of this appendix); and
(2) The greater of:
(i) The estimate of potential losses on the [bank]'s equity exposures (other than equity exposures referenced in paragraph (d)(1) of this section) generated by the [bank]'s internal equity exposure model multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value of the [bank]'s publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of this appendix, and are not equity exposures to an investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs.
(a)
(2) The risk-weighted asset amount of an equity exposure to an investment fund that
(3) If an equity exposure to an investment fund is part of a hedge pair and the [bank] does not use the Full Look-Through Approach, the [bank] may use the ineffective portion of the hedge pair as determined under paragraph (c) of section 52 of this appendix as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value.
(b)
(1) Set the risk-weighted asset amount of the [bank]'s exposure to the fund equal to the product of:
(i) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the [bank]; and
(ii) The [bank]'s proportional ownership share of the fund; or
(2) Include the [bank]'s proportional ownership share of each exposure held by the fund in the [bank]'s IMA.
(c)
(d)
(e)
Under the IMA, in addition to holding risk-based capital against an equity derivative contract under this part, a [bank] must hold risk-based capital against the counterparty credit risk in the equity derivative contract by also treating the equity derivative contract as a wholesale exposure and computing a supplemental risk-weighted asset amount for the contract under part IV. Under the SRWA, a [bank] may choose not to hold risk-based capital against the counterparty credit risk of equity derivative contracts, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a [bank] using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.
(a)
(1) The [bank]'s operational risk quantification system is able to generate an estimate of the [bank]'s operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the [bank]'s operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and
(2) The [bank]'s methodology for incorporating the effects of insurance, if the [bank] uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancellation terms of the policy, where less than one year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged operational loss event.
(b)
(1) Insurance that:
(i) Is provided by an unaffiliated company that has a claims payment ability that is rated in one of the three highest rating categories by a NRSRO;
(ii) Has an initial term of at least one year and a residual term of more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and
(v) Is explicitly mapped to a potential operational loss event; and
(2) Operational risk mitigants other than insurance for which the [AGENCY] has given prior written approval. In evaluating an operational risk mitigant other than insurance, the [AGENCY] will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding regulatory capital.
(a) If a [bank] does not qualify to use or does not have qualifying operational risk mitigants, the [bank]'s dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any).
(b) If a [bank] qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the [bank]'s dollar risk-based capital requirement for operational risk is the greater of:
(1) The [bank]'s operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or
(2) 0.8 multiplied by the difference between:
(i) The [bank]'s operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The [bank]'s risk-weighted asset amount for operational risk equals the [bank]'s dollar risk-based capital requirement for operational risk determined under paragraph (a) or (b) of this section multiplied by 12.5.
(a) Each [bank] must publicly disclose each quarter its total and tier 1 risk-based capital ratios and their components (that is, tier 1 capital, tier 2 capital, total qualifying capital, and total risk-weighted assets).
[Disclosure paragraph (b)]
[Disclosure paragraph (c)]
Administrative practices and procedure, Capital, National banks, Reporting and recordkeeping requirements, Risk.
Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, reporting and recordkeeping requirements, Securities.
Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities.
Administrative practice and procedure, Banks, banking, Capital Adequacy, Reporting and recordkeeping requirements, Savings associations, State nonmember banks.
Reporting and recordkeeping requirements, Savings associations, Subsidiaries.
Consumer protection, Investments, Manufactured homes, Mortgages, Reporting and recordkeeping requirements, Savings associations, Securities.
Accounting, Administrative practice and procedure, Advertising, Conflict of interest, Crime, Currency, Holding companies, Investments, Mortgages, Reporting and recordkeeping requirements, Savings associations, Securities, Surety bond.
Capital, Reporting and recordkeeping requirements, Savings associations.
For the reasons stated in the common preamble, the Office of the Comptroller of the Currency amends part 3 of chapter I of Title 12, Code of Federal Regulations as follows:
12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, and 3909.
(b)
(i) Has consolidated assets, as reported on the most recent year-end Consolidated Report of Condition and Income (Call Report) equal to $250 billion or more; * * *
(3) * * * In making a determination under this paragraph, the OCC will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 3.12.
(c)
(2) * * *
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the OCC's real estate lending standards at 12 CFR part 34, Subpart D;
(a)
(b)
(k) * * *
(1) * * *
(iv) The bank is well capitalized, as defined in the OCC's prompt corrective action regulation at 12 CFR part 6. * * *
(4) The risk-based capital ratios of the bank must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR part 3, Appendix A.
12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
(b)
(i) Has consolidated assets, as reported on the most recent year-end Consolidated Report of Condition and Income (Call Report) equal to $250 billion or more; * * *
(3) * * * In making a determination under this paragraph, the Federal Reserve will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(c)
(2) * * *
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the Federal Reserve's real estate lending standards at 12 CFR part 208, Appendix C;
(a)
(b)
(k) * * *
(1) * * *
(iv) The bank is well capitalized, as defined in the Federal Reserve's prompt corrective action regulation at 12 CFR part 208, Subpart D.* * *
(4) The risk-based capital ratios of the bank must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR part 208, Appendix A.
12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and 3909; 15 U.S.C. 6801 and 6805.
(b) * * *
(1) This appendix applies to a bank holding company that:
(i) Is not a consolidated subsidiary of another bank holding company that uses this appendix to calculate its risk-based capital requirements; and
(ii) That:
(A) Is a U.S.-based bank holding company that has total consolidated assets (excluding assets held by an insurance underwriting subsidiary), as reported on the most recent year-end FR Y-9C Report, equal to $250 billion or more;
(B) Has consolidated total on-balance sheet foreign exposure at the most recent year-end equal to $10 billion or more (where total on-balance sheet foreign exposure equals total cross-border claims less claims with head office or guarantor located in another country plus redistributed guaranteed amounts to the country of head office or guarantor plus local country claims on local residents plus revaluation gains on foreign exchange and derivative products, calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) 009 Country Exposure Report); or
(C) Has a subsidiary depository institution that is required, or has elected, to use 12 CFR part 3, Appendix C, 12 CFR part 208, Appendix F, 12 CFR part 325, Appendix F, or 12 CFR part 567, Appendix C to calculate its risk-based capital requirements.
(3) * * * In making a determination under this paragraph, the Federal Reserve will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(c)
(2) * * *
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the relevant agency's real estate lending standards at 12 CFR part 34, Subpart D (OCC), 12 CFR part 208, Appendix C (Federal Reserve); 12 CFR part 365, Subpart D (FDIC); and 12 CFR 560.100-560.101 (OTS).
(c) * * *
(8) A bank holding company must also deduct an amount equal to the minimum regulatory capital requirement established by the regulator of any insurance underwriting subsidiary of the holding company. For U.S.-based insurance underwriting subsidiaries, this amount generally would be 200 percent of the subsidiary's Authorized Control Level as established by the appropriate state regulator of the insurance company.
(a)
(b)
(k) * * *
(1) * * *
(iv) The bank holding company is well capitalized, as defined in the Federal Reserve's prompt corrective action regulation at 12 CFR part 208, Subpart D.* * *
(4) The risk-based capital ratios of the bank holding company must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR part 225, Appendix A.
(b)(1) Each consolidated bank holding company that is not a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction and has successfully completed its parallel run must provide timely public disclosures each calendar quarter of the information in tables 11.1-11.11 below. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the bank holding company's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be provided as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the bank holding company's risk management objectives and policies, reporting system, and definitions) may be disclosed annually, provided any significant changes to these are disclosed in the interim. Management is encouraged to provide all of the disclosures required by this appendix in one place on the bank holding company's public Web site.
(2) Each bank holding company is required to have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this appendix, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the bank holding company must attest that the disclosures meet the requirements of this appendix.
(3) If a bank holding company believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public information that is either proprietary or confidential in nature, the bank holding company need not disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
For
• Strategies and processes;
• The structure and organization of the relevant risk management function;
• The scope and nature of risk reporting and/or measurement systems;
• Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note).
(b)
(i) Has consolidated assets, as reported on the most recent year-end Consolidated Report of Condition and Income (Call Report) equal to $250 billion or more;
(3) * * * In making a determination under this paragraph, the FDIC will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 325.6(c).
(c)
(2) * * *
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the FDIC's real estate lending standards at 12 CFR part 365, Appendix A.
(a)
(b)
(k) * * *
(1) * * *
(iv) The bank is well capitalized, as defined in the FDIC 's prompt corrective action regulation at 12 CFR part 325, Subpart B. For purposes of determining whether a bank is well capitalized for purposes of this paragraph, the bank's capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section. * * *
(4) The risk-based capital ratios of the bank must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR part 325, Appendix A.
12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828.
(b) * * *
(1) You and your GAAP-consolidated subsidiaries may, in the aggregate, make loans of up to 15% of your total capital, as described in part 567 of this chapter to each subordinate organization that does not qualify as a GAAP-consolidated subsidiary. All loans made under this paragraph (b)(1) may not, in the aggregate, exceed 50% of your total capital, as described in part 567 of this chapter.
12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 1828, 3803, 3806, 42 U.S.C. 4106.
12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 1817, 1820, 1828, 1831o, 3806; 31 U.S.C. 5318; 42 U.S.C. 4106.
12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828(note).
(a) This part prescribes the minimum regulatory capital requirements for savings associations. Subpart B of this part applies to all savings associations, except as described in paragraph (b) of this section.
(b)(1) A savings association that uses Appendix C of this part must comply with the minimum qualifying criteria for internal risk measurement and management processes for calculating risk-based capital requirements, utilize the methodologies for calculating risk-based capital requirements, and make the required disclosures described in that appendix.
(2) Subpart B of this part does not apply to the computation of risk-based capital requirements by a savings association that uses Appendix C of this part. However, these savings associations:
(i) Must compute the components of capital under § 567.5, subject to the modifications in sections 11 and 12 of Appendix C of this part.
(ii) Must meet the leverage ratio requirement at §§ 567.2(a)(2) and 567.8 with tier 1 capital, as computed under sections 11 and 12 of Appendix C of this part.
(iii) Must meet the tangible capital requirement described at §§ 567.2(a)(3) and 567.9.
(iv) Are subject to §§ 567.3 (individual minimum capital requirement), 567.4 (capital directives); and 567.10 (consequences of failure to meet capital requirements).
(v) Are subject to the reservations of authority at § 567.11, which supplement the reservations of authority at section 1 of Appendix C of this part.
For the purposes of this subpart:
(a)
(b)
(d)
(a)
(e) If a savings association fails to meet the risk-based capital requirement, the leverage ratio requirement, or the tangible capital requirement established under this part, the Director may, through enforcement proceedings or otherwise, require such savings association to take one or more of the following corrective actions:
(b)
(i) Has consolidated assets, as reported on the most recent year-end Thrift Financial Report (TFR) equal to $250 billion or more;
(3) * * * In making a determination under this paragraph, the OTS will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in § 567.3(d).
(c)
(i) If the exposure or segment is a security classified as available-for-sale, the savings associations carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any unrealized gains on the exposure or segment and plus any unrealized losses on the exposure or segment; or
(ii) If the exposure or segment is not a security classified as available-for-sale, the savings association's carrying value (including net accrued but unpaid interest and fees) for the exposure or segment.
(2) * * *
(i) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio in the OTS's real estate lending standards at 12 CFR 560.100-560.101;
(7) The underlying exposures are not owned by a firm an investment in which is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or jobs.
(a)
(b)
(a)
(k) * * *
(1) * * *
(iv) The savings association is well capitalized, as defined in the OTS's prompt corrective action regulation at 12 CFR part 565. * * *
(4) The risk-based capital ratios of the savings association must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section as provided in 12 CFR 567.6(b)(5)(v).
(b) * * *
(3) * * *
(i) An equity exposure that is designed primarily to promote community welfare, including the welfare of low- and moderate-income communities or families, such as by providing services or jobs, excluding equity exposures to an unconsolidated small business investment company and equity exposures held through a consolidated small business investment company described in section 302 of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(c)(1) Each consolidated savings association described in paragraph (b) of this section that is not a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction and has successfully completed its parallel run must provide timely public disclosures each calendar quarter of the information in tables 11.1-11.11 below. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the savings association's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be provided as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the savings association's risk management objectives and policies, reporting system, and definitions) may be disclosed annually, provided any significant changes to these are disclosed in the interim. Management is encouraged to provide all of the disclosures required by this appendix in one place on the savings association's public Web site.
(2) Each savings association is required to have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this appendix, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the savings association must attest that the disclosures required by this appendix meet the requirements of this appendix.
(3) If a savings association believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public information that is either proprietary or confidential in nature, the savings association need not disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
For each separate risk area described in tables 11.4 through 11.11, the savings association must describe its risk management objectives and policies, including:
• strategies and processes;
• the structure and organization of the relevant risk management function;
• the scope and nature of risk reporting and/or measurement systems;
• policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
Such a breakdown might, for instance, be (a) loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures, (b) debt securities, and (c) OTC derivatives.
A savings association might choose to define the geographical areas based on the way the company's portfolio is geographically managed. The criteria used to allocate the loans to geographical areas must be specified.
By Order of the Board of Directors. Federal Deposit Insurance Corporation.
By the Office of Thrift Supervision.
The Department of State submits the following comprehensive listing of the statements which, as required by law, Federal employees filed with their employing agencies during calendar year 2006 concerning gifts received from foreign government sources. The compilation includes reports of both tangible gifts and gifts of travel or travel expenses of more than minimal value, as defined by statute. Also, included are gifts received in previous years including 3 gifts in 1999, 2 gifts in 2000, 1 gift in 2001, 9 gifts in 2002, 3 gifts in 2003, 13 gifts in 2004 and 28 gifts in 2005. These latter gifts and expenses are being reported in 2006 as the Office of Protocol, Department of State, did not receive the relevant information to include them in earlier reports.
Publication of this listing in the
Environmental Protection Agency (EPA).
Advance notice of proposed rulemaking.
EPA is issuing this Advance Notice of Proposed Rulemaking (ANPRM) to invite comment from all interested parties on our plan to propose new emission standards and other related provisions for new compression-ignition marine engines with per cylinder displacement at or above 30 liters per cylinder. We refer to these engines as Category 3 marine engines. We are considering standards for achieving large reductions in oxides of nitrogen (NO
Category 3 marine engines are important contributors to our nation's air pollution today and these engines are projected to continue generating large amounts of NO
Comments must be received on or before March 6, 2008.
Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2007-0121, by one of the following methods:
•
•
•
•
•
Michael Samulski, Assessment and Standards Division, Office of Transportation and Air Quality, 2000 Traverwood Drive, Ann Arbor, MI, 48105; telephone number: (734) 214-4532; fax number: (734) 214-4050; e-mail address:
This action will affect companies that manufacture, sell, or import into the United States new marine compression-ignition engines for use on vessels flagged or registered in the United States; companies and persons that make vessels that will be flagged or registered in the United States and that use such engines; and the owners or operators of such U.S. vessels. Owners and operators of vessels flagged elsewhere may also be affected, to the extent they use U.S. shipyards or maintenance and repair facilities; see also Section VII.E regarding potential application of the standards to foreign vessels that enter U.S. ports. Finally, this action may also affect companies and persons that rebuild or maintain these engines. Affected categories and entities include the following:
1.
2.
• Identify the rulemaking by docket number and other identifying information (subject heading,
• Follow directions—The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number.
• Explain why you agree or disagree, suggest alternatives, and substitute language for your requested changes.
• Describe any assumptions and provide any technical information and/or data that you used.
• If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced.
• Provide specific examples to illustrate your concerns, and suggest alternatives.
• Explain your views as clearly as possible, avoiding the use of profanity or personal threats.
• Make sure to submit your comments by the comment period deadline identified.
The current emission standards for new compression-ignition marine engines with per cylinder displacement at or above 30 liters per cylinder were adopted in 2003 (see 68 FR 9746, February 28, 2003). This ANPRM relies in part on information that was obtained for that rule, which can be found in Public Docket EPA-HQ-OAR-2003-0045. This docket is incorporated into the docket for this action, EPA-HQ-OAR-2007-0121.
In recent years, EPA has adopted major new programs designed to reduce emissions from diesel engines. When fully phased in, these new programs for highway
We have also recently proposed a new emission control program for locomotives and marine diesel engines.
Marine diesel engines above 30 liters per cylinder, called Category 3 marine diesel engines, are significant contributors to our national mobile source emission inventory. Category 3 marine engines are predominantly used in ocean-going vessels (OGV). The contribution of these engines to national inventories is described in section VIII.A of this preamble. These inventories are expected to grow significantly due to expected increases in foreign trade. Without new controls, we anticipate that their overall contribution to mobile source oxides of nitrogen (NO
Reducing emissions from these engines can lead to improvements in public health and would help states and localities attain and maintain the PM and ozone national ambient air quality standards. Both ozone and PM
Category 3 marine engines are currently subject to emission standards that rely on engine-based technologies to reduce emissions. These standards, which were adopted in 2003 and went into effect in 2004, are equivalent to the NO
In this ANPRM, we describe the emission program we are considering for Category 3 marine diesel engines and technologies we believe can be used to achieve those standards. The remainder of this section provides background on our current emission control program and gives an overview of the program we are considering. Section II provides a brief discussion of the health and human impacts of emissions from Category 3 marine diesel engines. Section III identifies relevant Clean Air Act provisions and Section IV summarizes our interactions with the International Maritime Organization (IMO). In Sections V and VI, we describe the potential emission limits and the emission control technologies that can be used to meet them. Section VII discusses several compliance issues. In Section VIII, we summarize the contribution of these engines to current mobile source NO
EPA currently has emission standards for Category 3 marine diesel engines. The standards, adopted in 2003, are equivalent to the MARPOL Annex VI NO
In our 2003 final rule, we considered adopting standards that would achieve greater emission reductions through expanding the use and optimization of in-cylinder controls as well as through the use of advanced emission control technologies including water technologies (water injection, emulsification, humidification) and selective catalytic reduction (SCR). However, we determined that it was appropriate to defer a final decision on the longer-term Tier 2 standards to a future rulemaking. While there was a certain amount of information available at the time about the advanced technologies, there were several outstanding technical issues concerning the widespread commercial use of those technologies. Deferring the Tier 2 standards to a second rulemaking allowed us the opportunity to obtain important additional information on the use of these advanced technologies that we expected to become available over the next few years. This new information was expected to include: (1) New developments as manufacturers continue to make various improvements to the technology and address any remaining concerns, (2) data or experience from recently initiated in-use installations using the advanced technologies, and (3) information from
Finally, because the standards adopted in our 2003 rulemaking were equivalent to the international standards, we determined that it was appropriate to defer a decision on the application of federal standards to engines on foreign-flagged vessels that enter U.S. ports. We indicated that we would consider this issue again in our future rulemaking, and we intend to evaluate how best to address emissions from foreign vessels in this action. We expect our proposal to reflect an approach similar to the emission program recently proposed by the United States in the current discussions at the IMO to amend the MARPOL Annex VI standards to a level that achieves significant reductions in NO
As described in Section VI, continuing advancements in diesel engine control technology support the adoption of long-term technology-forcing standards for Category 3 engines. With regard to NO
We are currently considering an emission control program for new Category 3 marine diesel engines that takes advantage of these new emission reduction approaches. The program we are considering, described in more detail in Section V, would focus on NO
For NO
We believe a two-phase approach under consideration is an effective way to maximize NO
For PM and SO
We are also considering NO
Category 3 marine engines subject to today's ANPRM generate significant emissions of fine particulate matter (PM
Many of our nation's most serious ozone and PM
The health and environmental effects associated with these emissions are a classic example of a negative externality (an activity that imposes uncompensated costs on others). With a negative externality, an activity's social cost (the cost borne by society imposed as a result of the activity taking place) exceeds its private cost (the cost to those directly engaged in the activity). In this case, emissions from Category 3 marine engines impose public health and environmental costs on society. However, these added costs to society are not reflected in the costs of those using these engines and equipment. The market system itself cannot correct this negative externality because firms in the market are rewarded for minimizing their operating costs, including the costs of pollution control. In addition, firms that may take steps to use equipment that reduces air pollution may find themselves at a competitive economic disadvantage compared to firms that do not. The emission standards that EPA is considering for Category 3 marine diesel engines would help address this market failure and reduce the negative externality from these emissions by providing a positive incentive for engine manufacturers to produce engines that emit fewer harmful pollutants and for vessel builders and owners to use those cleaner engines.
When considering vessel operations in the United States' Exclusive Economic Zone (EEZ), emissions from Category 3 marine engines account for a substantial portion of the United States' ambient PM
Both ozone and PM
Recent studies are showing that populations living near large diesel emission sources such as major roadways
Today millions of Americans continue to live in areas that do not meet existing air quality standards. As of June 2007 there are approximately 88 million people living in 39 designated areas (which include all or part of 208 counties) that either do not meet the current PM
Figure II-1 illustrates the widespread nature of these problems and depicts counties which are currently (as of March 2007) designated nonattainment for either or both the 8-hour ozone NAAQS and PM
Emissions from Category 3 marine engines account for a substantial and growing portion of the U.S.'s coastal ambient PM
Recently, new studies
In addition to public health impacts, there are serious public welfare and environmental impacts associated with ozone and PM
While EPA has already adopted many emission control programs that are expected to reduce ambient ozone and PM
In September 2006, EPA finalized revised PM
State and local governments are working to protect the health of their citizens and comply with requirements of the Clean Air Act (CAA or “the Act”). As part of this effort they recognize the need to secure additional major reductions in both PM
The emission control program for Category 3 marine engines has the potential to significantly reduce their contribution to PM
Particulate matter (PM) represents a broad class of chemically and physically diverse substances. It can be principally characterized as discrete particles that exist in the condensed (liquid or solid) phase spanning several orders of magnitude in size. PM is further described by breaking it down into size fractions. PM
Fine particles are produced primarily by combustion processes and by transformations of gaseous emissions (e.g., SO
The primary PM
EPA has recently amended the NAAQS for PM
With regard to the secondary PM
The 2006 standards became effective on December 18, 2006. As a result of the 2006 PM
Scientific studies show ambient PM is associated with a series of adverse health effects. These health effects are discussed in detail in the 2004 EPA Particulate Matter Air Quality Criteria Document (PM AQCD), and the 2005 PM Staff Paper.
Health effects associated with short-term exposures (hours to days) to ambient PM include premature mortality, increased hospital admissions, heart and lung diseases, increased cough, adverse lower-respiratory symptoms, decrements in lung function and changes in heart rate rhythm and other cardiac effects. Studies examining populations exposed to different levels of air pollution over a number of years, including the Harvard Six Cities Study and the American Cancer Society Study, show associations between long-term exposure to ambient PM
The health effects of PM
The emissions reduction program under consideration for Category 3 marine engines would reduce the contribution of these engines NO
Ground-level ozone pollution is formed by the reaction of VOCs and NO
The science of ozone formation, transport, and accumulation is complex.
The highest levels of ozone are produced when both VOC and NO
When NO
Rural areas are usually NO
The current ozone NAAQS has an 8-hour averaging time. The 8-hour ozone NAAQS is met at an ambient air quality monitoring site when the average of the annual fourth-highest daily maximum 8-hour average ozone concentration over three years is less than or equal to 0.084 ppm. On June 20, 2007 EPA proposed to strengthen the ozone NAAQS. The proposed revisions reflect new scientific evidence about ozone and its effects on public health and welfare.
The health and welfare effects of ozone are well documented and are assessed in EPA's 2006 ozone Air Quality Criteria Document (ozone AQCD) and EPA staff papers.
The recent ozone AQCD also examined relevant new scientific information which has emerged in the past decade, including the impact of ozone exposure on such health effect indicators as changes in lung structure and biochemistry, inflammation of the lungs, exacerbation and causation of asthma, respiratory illness-related school absence, hospital admissions and premature mortality. Animal toxicological studies have suggested potential interactions between ozone and PM with increased responses observed to mixtures of the two pollutants compared to either ozone or PM alone. The respiratory morbidity observed in animal studies along with the evidence from epidemiologic studies supports a causal relationship between acute ambient ozone exposures and increased respiratory-related emergency room visits and hospitalizations in the warm season. In addition, there is suggestive evidence of a contribution of ozone to cardiovascular-related morbidity and non-accidental and cardiopulmonary mortality.
People experience elevated risk of cancer and other noncancer health effects from exposure to air toxics. Mobile sources are responsible for a significant portion of this exposure. According to the National Air Toxic Assessment (NATA) for 1999, mobile sources, including Category 3 marine engines, were responsible for 44 percent of outdoor toxic emissions and almost 50 percent of the cancer risk among the 133 pollutants quantitatively assessed in the 1999 NATA. Benzene is the largest contributor to cancer risk of all the assessed pollutants and mobile sources were responsible for about 68 percent of all benzene emissions in 1999. Although the 1999 NATA did not quantify cancer risks associated with exposure to diesel exhaust, EPA has concluded that diesel exhaust ranks with the other air toxic substances that the national-scale assessment suggests pose the greatest relative risk.
According to the 1999 NATA, nearly the entire U.S. population was exposed to an average level of air toxics that has the potential for adverse respiratory noncancer health effects. This potential was indicated by a hazard index (HI) greater than 1.
It should be noted that the NATA modeling framework has a number of limitations which prevent its use as the sole basis for setting regulatory standards. These limitations and uncertainties are discussed on the 1999 NATA Web site.
The following section provides a brief overview of air toxics which are associated with nonroad engines, including Category 3 marine engines, and provides a discussion of the health risks associated with each air toxic.
Category 3 marine engines emit diesel exhaust (DE), a complex mixture comprised of carbon dioxide, oxygen, nitrogen, water vapor, carbon monoxide, nitrogen compounds, sulfur compounds and numerous low-molecular-weight hydrocarbons. A number of these gaseous hydrocarbon components are individually known to be toxic including aldehydes, benzene and 1,3-butadiene. The diesel particulate matter (DPM) present in diesel exhaust consists of fine particles (< 2.5 μm), including a subgroup with a large number of ultrafine particles (< 0.1 μm). These particles have large surface area which makes them an excellent medium for adsorbing organics and their small size makes them highly respirable and able to reach the deep lung. Many of the organic compounds present on the particles and in the gases are individually known to have mutagenic and carcinogenic properties. Diesel exhaust varies significantly in chemical composition and particle sizes between different engine types (heavy-duty, light-duty), engine operating conditions (idle, accelerate, decelerate), and fuel formulations (high/low sulfur fuel).
In EPA's 2002 Diesel Health Assessment Document (Diesel HAD),
This document is available electronically at
For the Diesel HAD, EPA reviewed 22 epidemiologic studies on the subject of the carcinogenicity of workers exposed to diesel exhaust in various occupations, finding increased lung cancer risk, although not always statistically significant, in 8 out of 10 cohort studies and 10 out of 12 case-control studies within several industries, including railroad workers. Relative risk for lung cancer associated with exposure ranged from 1.2 to 1.5, although a few studies show relative risks as high as 2.6. Additionally, the Diesel HAD also relied on two independent meta-analyses, which examined 23 and 30 occupational studies respectively, which found statistically significant increases in smoking-adjusted relative lung cancer risk associated with diesel exhaust, of 1.33 to 1.47. These meta-analyses demonstrate the effect of pooling many studies and in this case show the positive relationship between diesel exhaust exposure and lung cancer across a variety of diesel exhaust-exposed occupations.
In the absence of a cancer unit risk, the Diesel HAD sought to provide additional insight into the significance of the diesel exhaust-cancer hazard by estimating possible ranges of risk that might be present in the population. An exploratory analysis was used to characterize a possible risk range by comparing a typical environmental exposure level for highway diesel sources to a selected range of occupational exposure levels. The occupationally observed risks were then proportionally scaled according to the exposure ratios to obtain an estimate of the possible environmental risk. A number of calculations are needed to accomplish this, and these can be seen in the EPA Diesel HAD. The outcome was that environmental risks from diesel exhaust exposure could range from a low of 10−4 to 10−5 to as high as 10−3, reflecting the range of occupational exposures that could be associated with the relative and absolute risk levels observed in the occupational studies. Because of uncertainties, the analysis acknowledged that the risks could be lower than 10− or 10−5, and a zero risk from diesel exhaust exposure was not ruled out.
Retrospective health studies of railroad workers have played an important part in determining that diesel exhaust is a likely human carcinogen. Key evidence of the diesel exhaust exposure linkage to lung cancer comes from two retrospective case-control studies of railroad workers which are discussed at length in the Diesel HAD.
Noncancer health effects of acute and chronic exposure to diesel exhaust emissions are also of concern to the Agency. EPA derived an RfC from consideration of four well-conducted chronic rat inhalation studies showing adverse pulmonary effects.
The Diesel HAD briefly summarizes health effects associated with ambient PM and discusses the EPA's annual NAAQS of 15 μg/m
Exposure of people to diesel exhaust depends on their various activities, the time spent in those activities, the locations where these activities occur, and the levels of diesel exhaust pollutants in those locations. The major difference between ambient levels of diesel particulate and exposure levels for diesel particulate is that exposure accounts for a person moving from location to location, proximity to the emission source, and whether the exposure occurs in an enclosed environment.
Occupational exposures to diesel exhaust from mobile sources, including Category 3 marine engines, can be several orders of magnitude greater than typical exposures in the non-occupationally exposed population.
Over the years, diesel particulate exposures have been measured for a number of occupational groups resulting in a wide range of exposures from 2 to 1,280 μg/m
Regions immediately downwind of marine ports and shipping channels experience elevated ambient concentrations of directly-emitted PM
A recent study conducted by the California Air Resources Board (CARB) examined the air quality impacts of railroad operations at the J.R. Davis Rail Yard, the largest service and maintenance rail facility in the western United States.
Another study from CARB evaluated air quality impacts of diesel engine emissions within the Ports of Long Beach and Los Angeles in California, one of the largest ports in the U.S.
Overall, while these studies focus on only two large marine port and railroad facilities, they highlight the substantial contribution these facilities make to elevated ambient concentrations in populated areas.
We initiated a study in 2006 to better understand the populations that are living near rail yards and marine ports nationally. As part of this effort, a computer geographic information system (GIS) is being used to identify the locations and property boundaries of these facilities nationally, and to determine the size and demographic characteristics of the population living near these facilities. We anticipate that the results of this study will be completed in late 2007 and we intend to add this report to the public docket.
Category 3 marine engine emissions contribute to ambient levels of other air toxics known or suspected as human or animal carcinogens, or that have non-cancer health effects. These other compounds include benzene, 1,3-butadiene, formaldehyde, acetaldehyde, acrolein, polycyclic organic matter (POM), and naphthalene. All of these compounds, except acetaldehyde, were identified as national or regional risk drivers in the 1999 National-Scale Air Toxics Assessment (NATA). That is, for a significant portion of the population, these compounds pose a significant portion of the total cancer and noncancer risk from breathing outdoor air toxics. Furthermore, a significant portion of total nationwide emissions of these pollutants result from mobile sources. However, EPA does not have high confidence in the NATA data for all these compounds. Reducing the emissions from Category 3 marine engines would help reduce exposure to these harmful substances.
Air toxics can cause a variety of cancer and noncancer health effects. A number of the mobile source air toxic pollutants described in this section are known or likely to pose a cancer hazard in humans. Many of these compounds also cause adverse noncancer health effects resulting from inhalation exposures. These include neurological, cardiovascular, liver, kidney, and respiratory effects as well as effects on the immune and reproductive systems.
There are a number of public welfare effects associated with the presence of ozone and PM
Visibility can be defined as the degree to which the atmosphere is transparent to visible light. Visibility impairment manifests in two principal ways: as local visibility impairment and as regional haze.
Visibility is important because it has direct significance to people's enjoyment of daily activities in all parts of the country. Individuals value good visibility for the well-being it provides them directly, where they live and work, and in places where they enjoy recreational opportunities. Visibility is also highly valued in significant natural areas such as national parks and wilderness areas and special emphasis is given to protecting visibility in these areas. For more information on visibility
Fine particles are the major cause of reduced visibility in parts of the United States. EPA is pursuing a two-part strategy to address visibility. First, to address the welfare effects of PM on visibility, EPA set secondary PM
Category 3 marine engines contribute to visibility concerns in these areas through their primary PM
Recently designated PM
Ozone contributes to many environmental effects, with impacts to plants and ecosystems being of most concern. Ozone can produce both acute and chronic injury in sensitive species depending on the concentration level and the duration of the exposure. Ozone effects also tend to accumulate over the growing season of the plant, so that even lower concentrations experienced for a longer duration have the potential to create chronic stress on vegetation. Ozone damage to plants includes visible injury to leaves and a reduction in food production through impaired photosynthesis, both of which can lead to reduced crop yields, forestry production, and use of sensitive ornamentals in landscaping. In addition, the reduced food production in plants and subsequent reduced root growth and storage below ground, can result in other, more subtle plant and ecosystems impacts. These include increased susceptibility of plants to insect attack, disease, harsh weather, interspecies competition and overall decreased plant vigor. The adverse effects of ozone on forest and other natural vegetation can potentially lead to species shifts and loss from the affected ecosystems, resulting in a loss or reduction in associated ecosystem goods and services. Lastly, visible ozone injury to leaves can result in a loss of aesthetic value in areas of special scenic significance like national parks and wilderness areas. The final 2006 ozone Air Quality Criteria Document (ozone AQCD)
As discussed above, Category 3 marine engine emissions of NO
Acid deposition, or acid rain as it is commonly known, occurs when NO
The proposed NO
The NO
Severe and persistent eutrophication often directly impacts human activities. For example, losses in the nation's fishery resources may be directly caused by fishkills associated with low dissolved oxygen and toxic blooms. Declines in tourism occur when low dissolved oxygen causes noxious smells and floating mats of algal blooms create unfavorable aesthetic conditions. Risks to human health increase when the toxins from algal blooms accumulate in edible fish and shellfish, and when toxins become airborne, causing respiratory problems due to inhalation. According to the NOAA report, more than half of the nation's estuaries have moderate to high expressions of at least one of these symptoms—an indication that eutrophication is well developed in more than half of U.S. estuaries.
The deposition of airborne particles can reduce the aesthetic appeal of buildings and culturally important articles through soiling, and can contribute directly (or in conjunction with other pollutants) to structural damage by means of corrosion or erosion.
Section 213 of the Clean Air Act (the Act) gives us the authority to establish emission standards for nonroad engines and vehicles. Section 213(a)(3) requires the Administrator to set (and from time to time revise) standards for NO
Section 211(c) of the CAA allows us to regulate fuels where emission products of the fuel either: (1) Cause or contribute to air pollution that reasonably may be anticipated to endanger public health or welfare, or (2) will impair to a significant degree the performance of any emission control device or system which is in general use, or which the Administrator finds has been developed to a point where in a reasonable time it will be in general use were such a regulation to be promulgated.
Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL) addresses air pollution from ships. Annex VI was adopted by the Parties to MARPOL at a Diplomatic Conference on September 26, 1997, and it went into force May 20, 2005. As of July 31, 2007, the Annex has been ratified by 44 countries, representing 74.1 percent of the world's merchant shipping tonnage.
Globally harmonized regulation of ship emissions is generally recognized to be the preferred approach for addressing air emissions from ocean-going vessels. It reduces costs for ship owners, since they would not be required to comply with a patchwork of different standards that could occur if each country was setting its own standards, and it can simplify environmental protection for port and coastal states.
The significance of international shipping to the United States can be illustrated by port entrance statistics. In 1999, according to U.S. Maritime Administration (MARAD) data, about 90 percent of annual entrances to U.S. ports were made by foreign-flagged vessels (75,700 total entrances; 67,500 entrances by foreign vessels; entrances are for vessels engaged in foreign trade and do not include Jones Act
The emission control program contained in Annex VI was the first step for the international control of air pollution from ships. However, as early as the 1997 conference, many countries “already recognized that the NO
The United States began advocating a review of the NO
Over the past several years, remarkable progress has been made for land-based highway and nonroad diesel engines in reducing NO
The program we are considering is based on the the U.S. Government proposal to IMO, which consists of near- and long-term NO
This section describes in greater detail how we are considering that emission control program for our federal action under the Clean Air Act.
Engines may be retrofitted to achieve meaningful emission reduction by applying technology used by manufacturers to meet the Tier 1 limits. These technologies include slide-valve fuel injectors and injection timing retard. Manufacturers have indicated that they can reduce NO
Over time, engine manufacturers have changed their engine platforms as new
For PM and SO
We request comment on setting a PM standard on the order of 0.5 g/kW-hr and a SO
Engine manufacturers are meeting the Tier 1 NO
Manufacturers have indicated that they would be able to use in-cylinder engine control strategies to achieve further NO
Many of the same in-cylinder control technologies used to meet the Tier 1 NO
NO
Water may be introduced into the combustion process through emulsification with the fuel, direct injection into the combustion chamber, or saturating the intake air with water vapor. Water emulsification refers to mixing the fuel and water prior to injection. This strategy is limited by the instability of the water in the fuel, but can be improved by mixing the water into the fuel just prior to injection into the cylinder. More effective control can be achieved through the use of an independent injection nozzle in the cylinder for the water. Using a separate injector nozzle for water allows larger amounts of water to be added to the combustion process because the water is injected simultaneously with the fuel, and larger injection pumps and nozzles can be used for the water injection. In addition, the fuel injection timing and water flow rates can be better optimized at different engine speeds and loads. Even higher water-to-fuel ratios can be achieved through the use of combustion air humidification and steam injection. With combustion air humidification, a water nozzle is placed in the engine intake and an air heater is used to offset condensation. With steam injection, waste heat is used to vaporize water, which is then injected into the combustion chamber during the compression stroke.
Depending on the targeted NO
Exhaust gas recirculation (EGR) is a strategy similar to water-based NO
NO
SCR has also been demonstrated for use with marine diesel engines. More than 300 SCR systems have been installed on marine vessels, some of which have been in operation for more than 10 years and have accumulated 80,000 hours of operation.
An SCR catalyst reduces nitrogen oxides to elemental nitrogen (N
Manufacturers report minimum exhaust temperatures for SCR units to be in the range of 250 to 300 °C, depending on the catalyst system design and fuel sulfur level.
SCR can be operated in exhaust streams at or above 500 °C before heat-related degradation of the catalyst becomes significant. This maximum exhaust temperature is sufficient for use with Category 3 marine engines. Exhaust valve temperatures are generally maintained below 450°C to minimize high temperature corrosion and fouling caused by vanadium and sodium present in residual fuel.
Modern SCR systems should be able to achieve very high NO
We believe there are several approaches that can be used to ensure that the exhaust temperature during low power operation is sufficiently high for the SCR unit to function properly. By positioning the SCR system ahead of the turbocharger, the heat to the SCR system can be maximized. This approach was used with vessels equipped with slow-speed engines that operated at low loads near the coast.
SCR grade urea is a widely used industrial chemical around the world. Although an infrastructure for widespread transportation, storage, and dispensing of SCR-grade urea does not currently exist in most places, we believe that it would develop as needed based on market forces. Concerning urea production capacity, the U.S. has more-than-sufficient capacity to meet the additional needs of the marine engines. Currently, the U.S. consumes 14.7 million tons of ammonia resources per year, and relies on imports for 41 percent of that total (of which, urea is the principal derivative). In 2005, domestic ammonia producers operated their plants at 66 percent of rated capacity, resulting in 4.5 million tons of reserve production capacity.
As discussed above, we are considering PM and SO
For typical diesel engines operating on distillate fuel, particulate matter formation is primarily the result of incomplete combustion of the fuel and lube oil. The traditional in-cylinder technologies discussed above for NO
The majority of Category 3 engines are designed to run on residual fuel which has the highest viscosity and lowest price of the petroleum fuel grades. Residual fuels are known by several names including heavy fuel oil (HFO), bunker C fuel, and marine fuel oil. This fuel is made from the very end products of the oil refining process, formulated from residues remaining in the primary distilling stages of the refining process. It has high content of ash, metals, nitrogen, and sulfur that increase emissions of exhaust PM pollutants. Typical residual fuel contains about 2.7 percent sulfur, but may have a sulfur content as high as 4.5 percent.
When a diesel engine is operating on very low sulfur distillate fuel, 80 to 90 percent of the PM in the exhaust is unburned hydrocarbons from the fuel and lubricating oil and carbon soot. When residual fuel is used, only about 25 to 35 percent of the PM from the engine is made up of unburned hydrocarbon compounds.
We believe that substantial PM and SO
In general, engines that are designed to operate on residual fuel are capable of operating on distillate fuel. For example, if the engine is to be shut down for maintenance, distillate fuel is typically used to flush out the fuel system. There are some issues that would need to be addressed for operating engines on distillate fuel that were designed primarily for use on residual fuel. Switching to distillate fuel requires 20 to 60 minutes, depending on how slowly the operator wants to cool the fuel temperatures. According to engine manufacturers, switching from a heated residual fuel to an unheated distillate too quickly could cause damage to fuel pumps. These fuel pumps would need to be designed to operate on both fuels if a fuel-switching strategy were employed. Separate fuel tanks would be needed for distillate fuel with sufficient capacity for potentially extended operation on this fuel. It is common for ships to have several fuel tanks today to accommodate the variety in different grades of residual fuel which may be incompatible with each other and, therefore, require segregation. Also, different lubricating oil is used with each fuel type. We believe that properly designed ships would be able to operate on distillate fuel either under a fuel-switching strategy or for extended use. We request comment on the practical implications of operating ships on either lower sulfur residual or distillate fuel for extended use.
Fuel quality may also affect NO
There are several types of processes refineries use to remove sulfur from fuels. Traditional sulfur removal technologies include installing a hydrocracker upstream, or a hydrotreater upstream or downstream, of the fluidized catalytic cracker (FCC) unit. Due to high refinery production costs, it is not likely that much new volume of residual fuel will be desulfurized to create 1,000 ppm heavy fuel oil. It is more likely that additional distillate fuel may be produced by cracking existing residual fuels or that blends of high and low sulfur fuels will be used. Some existing low sulfur residual fuel is already produced, though the volume is probably insufficient to fully meet fuel volume requirements for both ships and land-based applications subject to local sulfur emission requirements. We request comment on the availability of low sulfur marine fuels.
Another approach to reduce PM and SO
A scrubber system does not necessarily need to use sea water. An alternative approach is to circulate fresh water through the scrubber system. In this design, the pH of the wash water is monitored and additional caustic solution is added as necessary. If the pH becomes too low, the water will not absorb any further sulfur. During typical operation, a small amount of wash water is bled out of the system and fresh water is added to maintain volume. This prevents excessive build-up of contaminants in the wash water.
Water may be sprayed into the exhaust stream, or the exhaust gasses may be routed through a water bath. As the cooled exhaust gas rises out the stack, demisters are used to separate water droplets that may be entrained in the exhaust. The cleaned exhaust passes out of the scrubber through the top while the water, containing sulfates, is drained out through the bottom. Recent demonstration projects have shown scrubbers are capable of reducing SO
Exhaust gas scrubbers can achieve reductions in particulate matter as well. By removing sulfur from the exhaust, the scrubber removes most of the direct sulfate PM. As discussed above, sulfates are a large portion of the PM from ships operating on high sulfur fuels. By reducing the SO
Simply mixing alkaline water in the exhaust does not necessarily remove much of the carbonaceous PM, ash, or metals in the exhaust. While SO
It may be possible to achieve NO
Water-soluble components of the exhaust gas such as SO
In general, we expect to retain the certification and compliance provisions finalized with the Tier 1 standards. These include testing, durability, labeling, maintenance, prohibited acts, etc. However, we believe additional testing and compliance provisions will be necessary for new standards requiring more advanced technology and more challenging calibrations. These changes, as well as other modifications to our certification and compliance provisions, are discussed below.
In the past, there has been some concern regarding the use of older PM measurement procedures with high sulfur residual fuels. The primary issue of concern was variability of the PM measurement, which was strongly influenced by the amount of water bound to sulfur. However, we believe improvements in PM measurement procedures, such as those specified in 40 CFR 1065, have addressed these issues of measurement variability. The U.S. government recently submitted proposed procedures for PM measurement to IMO.
We are concerned about emission control performance when the engine is operated at low power. Category 3 engines operate at relatively low power levels when they are operating in port areas. Ship pilots generally operate engines at reduced power for several miles to approach a port, with even lower power levels very close to shore. The ISO E3 and E2 test cycles are used for emission testing of propulsion marine engines. These test cycles are heavily weighted towards high power. Therefore, it is very possible that manufacturers could meet the cycle-weighted average emission standards without significantly reducing emissions at low-power modes. Because low power operation is more prevalent for propulsion engines when they operate close to commercial ports, it is important that the emission control strategy be effective at low power operation to maximize on-shore emission benefits. This issue would generally not apply to vessels that rely on multiple engines providing electric-drive propulsion, because these engines can be shut down as needed to maintain the desired engine loading and therefore may not operate at low power settings. We request comment on the need for addressing emissions at low power operation and whether and how the test procedure should be changed to accommodate this operation. See section VI.B for additional discussion of low power NO
Appropriate test procedures need to represent in-use operating conditions as much as possible, including specification of test fuels consistent with the fuels that compliant engines will use over their lifetimes. For the Tier 1 standards, we allow engine testing using distillate fuel, even though vessels with Category 3 marine engines primarily use the significantly less expensive residual fuel. This provision is consistent with the specifications of the NO
For any NO
One of the features of the emission control technologies that could be used to achieve significant NO
The increased operating costs of such controls associated with urea or other catalysts or with distillate usage suggest that it may be reasonable to allow these systems to be turned off while a ship is operated on the open ocean, far away from sensitive areas that are affected by ship emissions. In other words, EPA could elect to set geographically-based NO
If EPA were to adopt such an approach, we would need to determine the areas in which ships would have to comply with the standards. We are currently exploring this issue through the air quality modeling for our proposed standards. There are other
We request comment on all aspects of this alternative, especially with regard to how such systems could be designed to ensure no loss of emission reductions.
Given the broad range of ignition properties for in-use residual fuels, we expect that our in-use adjustment allowance for Category 3 engines would result in a broad range of adjustment. We are therefore considering a requirement for operators to perform a simple field measurement test to confirm emissions after parameter adjustments or maintenance operations, using onboard emission measurement systems with electronic-logging equipment. We expect this issue will be equally important for more advanced engines that rely on water injection or aftertreatment for emission reductions. Onboard verification systems could add significant assurance that engines have properly operating emission controls.
We envision a simpler measurement system than the type specified in Chapter 6 of the NO
While we normally require certification only for newly built engines, we are considering emission standards that would apply to remanufactured engines in the existing fleet. This leads to questions about how one would certify the modified engines. We are considering adoption of one or more of the following simplified certification procedures for in-use engines:
• Basing certification for any engine on a pre-existing certificate if the engine is modified to be the same as a later engine that is already certified to the Tier 1 NO
• Testing in-use engines using portable emission measurement equipment, with appropriate consideration for any necessary deviations in the engine test cycle.
• Broadening the engine family concept for in-use engines to reduce the amount of testing necessary to certify a range of engines. This would require the same or similar hardware and calibration requirements to ensure that a single test engine can properly represent all the engines in the broader engine family.
• Developing alternatives to the NO
We request comment on the best approach for ensuring compliance from existing engines. We also request comment on the simplified certification procedures listed above.
We intend to apply the same exemptions to any new tier of Category 3 marine diesel engine standards as currently apply under our Tier 1 program. These exemptions, including the national security exemption, are set out in 40 CFR part 94, subpart J. We will also consider whether to include engines on foreign vessels in the program and whether we should also adopt standards for non-diesel engines such as gas turbine engines.
Our current federal marine diesel engine standards do not apply to Category 1, 2, and 3 marine diesel engines installed on foreign-flagged vessels. In our 2003 Final Rule we acknowledged the contribution of engines on foreign-flagged vessels to U.S. air pollution but did not apply federal standards to foreign vessels (see 68 FR 9759, February 28, 2003). This section summarizes the discussion from that 2003 Final Rule. We will continue to evaluate this issue as we develop the proposal for this rule.
Section 213 of the Clean Air Act (42 U.S.C. 7547), authorizes regulation of “new nonroad engine” and “new nonroad vehicle.” However, Title II of the Clean Air Act does not define either “new nonroad engine” or “new nonroad vehicle.” Section 216 defines a “new motor vehicle engine” to include an engine that has been “imported.” EPA modeled the current regulatory definitions of “new nonroad engine” and “new marine engine” at 40 CFR 89.2 and 40 CFR 94.2, respectively, after the statutory definitions of “new motor vehicle engine” and “new motor vehicle.” This was a reasonable exercise of the discretion provided to EPA by the Clean Air Act to interpret “new nonroad engine” or “new nonroad vehicle.” See
The 1999 marine diesel engine rule did not apply to marine engines on foreign vessels. 40 CFR 94.1(b)(3). At that time, we concluded that engines installed on vessels flagged or registered in another country, that come into the United States temporarily, will not be subject to the emission standards. At that time, we believed that they were not considered imported under the U.S. customs law. As a result, we did not apply the standards adopted in that rule to those vessels (64 FR 73300, Dec. 29, 1999).
The May 29, 2002 proposed rule for Category 3 marine diesel engines solicited comment on whether to exercise our discretion and modify the definition of a “new marine engine” to find that engine emission standards apply to foreign vessels that enter U.S. ports. However, in the February 28, 2003 final rule we determined that we did not need to determine whether we have the discretion to interpret “new” nonroad engine or vessel in such a manner.
Foreign vessels were expected to comply with the MARPOL standards whether or not they were also subject to the equivalent Clean Air Act standards being adopted in that final rule. Consequently, we concluded that no significant emission reductions would be achieved by treating foreign vessels as “new” for purposes of the Tier 1 standards and there would be no significant loss in emission reductions by not including them. Therefore, we did not include foreign engines and vessels in our 2003 rulemaking and we did not revise the definition of “new marine engine” at that time.
In this rule we will evaluate under what circumstances we may and should define new nonroad engine and vessel to include foreign engines and vessels. As part of that evaluation, we will also assess the progress made by the international community toward the adoption of new more stringent international consensus standards that reflect advanced emission-control technologies.
Gas turbine engines are internal combustion engines that can operate using diesel fuel, residual fuel, or natural gas, but do not operate on a compression-ignition or other reciprocating engine cycle. Power is extracted from the combustion gas using a rotating turbine rather than reciprocating pistons. While gas turbine engines are used primarily in naval ships, a small number are being used in commercial ships. In addition, we have received indication that their use is growing in some applications such as cruise ships and liquid natural gas carriers. As we develop the proposal for this rule we will consider whether it is appropriate to regulate emissions from gas turbine engines and, if so, whether special provisions would be needed for testing and certifying turbine engines. For example, since turbine engines have no cylinders, we may need to address how to apply any regulatory provisions that depend on a specified value for per-cylinder displacement. We would welcome any emissions information that is available for turbine engines.
Marine engines have been developed that can operate either on natural gas or a dual-fuel.
We request comment on fuels and engine types that we should consider in the scope of this rulemaking. We also request comments on test procedure or other compliance issues that would need to be considered for these fuels and engines.
The inventory contribution of Category 3 engines consists of two parts: emissions that occur in port areas and emissions that occur at various distances from the coast while vessels are underway. Although the issue of emissions transport is common to all of our air pollution control programs, these underway emissions suggest that Category 3 emissions are different from emissions from other mobile sources and result in at least two implications for the analysis we will perform for our proposal. First, the definition of the inventory modeling domain becomes important. In the inventory analysis described below we use a distance of 200 nautical miles from shore (see Figure VIII-1 below and associated text). This distance is reasonable based on both particle dynamics
This section contains our updated inventory estimates for Category 3 marine engines in the 200 nautical mile domain and a brief discussion of our inventory estimation methodology.
Category 3 marine engines contribute to the formation of ground level ozone and concentrations of fine particles in the ambient atmosphere. Based on our current emission inventory analysis of U.S. and foreign-flag vessels, we estimate that these engines contributed nearly 6 percent of mobile source NO
The United States is actively engaged in international trade and is frequently visited by ocean-going marine vessels. As shown in Figure II-1, the ports which accommodate these vessels are located along the entire coastline of the United States. Commercial marine vessels, powered by Category 3 marine engines, contribute significantly to the emissions inventory for many U.S. ports. This is illustrated in Table VIII-4 which presents the mobile source inventory contributions of these vessels for several ports. The ports in this table were selected to present a sampling over a wide geographic area along the U.S. coasts. In 2005, these twenty ports received approximately 60 percent of the vessel calls to the U.S. from ships of 10,000 DWT or greater.
The exhaust emission inventories presented above for commercial marine vessels, with Category 3 marine engines, include emissions from vessels in-port and from vessels engaged in interport transit. This section gives a general overview of the methodology used to estimate the emission contribution of these vessels. A more detailed description of this inventory analysis is available in the public docket.
For the purposes of this analysis, in-port operation includes cruising, reduced speed zone, maneuvering, and hotelling. The in-port analysis includes operation out to a 25 nautical mile radius from the entrance to the port. Interport operation includes ship traffic, within the U.S. Exclusive Economic Zone (EEZ), not included as part of the port emissions analysis. In general, the EEZ extends to 200 nautical miles from the U.S. coast. Exceptions include geographic regions near Canada, Mexico and the Bahamas where the EEZ extends less than 200 nautical miles from the U.S. coast.
The port inventories are based on detailed emission estimates for eleven specific ports. The port inventories were estimated using activity data for that port (number of port calls, vessel types and typical times in different operating modes) and an emission factor for each mode. Emission estimates for all other commercial ports were developed by matching each of the other commercial ports to one of the eleven specific ports. Matching was based on characteristics of port activity, such as predominant vessel types, harbor craft and region of the country. The detailed port emissions were then scaled for the other commercial ports based on relative port activity.
To calculate the mobile fractions in Table VIII-4, we compared commercial marine port inventory estimates described above to county-level mobile source emission estimates developed in support of the recent rulemaking for national PM ambient air quality standards.
Recently, the California Air Resources Board (ARB) sponsored the development of new national inventory estimates for Category 3 marine engines.
Our emission inventory estimates for interport traffic are based on the ARB-sponsored study with four primary modifications.
The detailed inventory studies described above were performed for 2002. To calculate emission inventories for future years, we applied separate growth rates for the West Coast, Gulf Coast, East Coast, and Great Lakes. These emission inventory growth estimates were determined based on economic growth projections of trade between the United States and other regions of the world.
The inventory estimates include emissions from both U.S. flagged vessels and foreign flagged vessels. The majority of the ship operation near the U.S. coast is from ships that are not registered in the United States. According to the U.S. Maritime Administration, in 2005, approximately 87 percent of the calls by ocean-going vessels (10,000 dead weight tons or greater) at U.S. ports were made by foreign vessels.
This inventory analysis includes emissions from Category 3 propulsion engines and the Category 2 and 3 auxiliary engines used on these vessels. Based on our emissions inventory analysis, auxiliary engines contribute approximately half of the exhaust emissions from vessels in port. In contrast, auxiliary engines only represent about 4 percent of the exhaust emissions from ships engaged in interport traffic.
The exhaust emission inventory for commercial marine vessels with Category 3 marine engines includes operation that extends out to 200 nautical miles from shore. Considering all emissions from ships operating in the U.S. EEZ, emissions in ports contribute to less than 20 percent of the total inventory. However, we recognize that emissions closer to shore are more likely to impact human health and welfare because of their proximity to human populations. We have initiated efforts to perform air quality modeling to quantify these impacts. The air quality modeling will consider transport of emissions over the ocean, meteorological data, population densities, emissions from other sources, and other relevant information. We request comment on the methodology used to develop exhaust inventory estimates for ships with Category 3 engines operating near the U.S. coast.
As discussed above, the national inventories presented here are for the Exclusive Economic Zone around the 50 states. Note that the ship traffic in the EEZ includes not only direct movements to and from U.S. ports but also movements up and down the coast. The boundaries for the EEZ are presented in Figure VIII-1.
Table VIII-5 presents the 2002 national exhaust emission inventory for commercial marine vessels, with Category 3 marine engines, subdivided into the seven regions shown in the above figure. The Alaska and Hawaii regions contribute to roughly one-fifth of the national emissions inventory. The inventory for the Alaska EEZ includes emissions from ships on a great circle route, along the Aleutian Islands, between Asia and the U.S. West Coast. Therefore, eastern Alaska, which includes most of the state population, is presented separately in the table below. The Hawaii EEZ includes major shipping lanes across the Pacific that pass near the Hawaiian isles.
The emission-control technologies we are considering for Category 3 marine engines are already in development or in commercial use in some marine applications. The draft Regulatory Impact Analysis
We will also consider the economics of desulfurizing residual fuel, using of distillate fuel, and blending high and low sulfur fuels. Due to high refinery production costs, it is not likely that much new volume of residual fuel will be desulfurized. We expect to employ a worldwide refinery modeling analysis to estimate the cost for desulfurizing residual fuel and to estimate the cost for the production of additional distillate fuel in our analysis for different fuel volume scenarios. Additionally, we will estimate scrubbing costs and potential scrubber penetration rates for ships, as the use of scrubbers is another method that ships may use to comply, in lieu of using low sulfur fuel. The resulting fuel cost from our refinery analysis will be compared to the costs from scrubbing and fuel blending to determine the most economical method for complying with the standards for Category 3 marine engines. We request comment on the potential costs of low sulfur marine fuels.
Under section (3)(f)(1) Executive Order 12866 (58 FR 51735, October 4, 1993), the Agency must determine whether the regulatory action is “significant” and therefore subject to review by the Office of Management and Budget (OMB) and the requirements of this Executive Order. This Advance Notice has been sent to the Office of Management and Budget (OMB) for review under Executive Order 12866 and any changes made in response to OMB recommendations have been documented in the docket for this action.
We will prepare information collection requirements as part of our proposed rule and submit them for approval to the Office of Management and Budget (OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501
The Regulatory Flexibility Act (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA), requires agencies to endeavor, consistent with the objectives of the rule and applicable statutes, to fit regulatory and information requirements to the scale of businesses, organizations, and governmental jurisdictions subject to their regulations. SBREFA amended the RFA to strengthen its analytical and procedural requirements and to ensure that small entities are adequately considered during rule development. The Agency accordingly requests comment on the potential impacts on a small entity of the program described in this notice. These comments will help the Agency meet its obligations under SBREFA and will suggest how EPA can minimize the impacts of this rule for small entities that may be adversely impacted.
Depending on the number of small entities identified prior to the proposal and the level of any contemplated regulatory action, we may convene a Small Business Advocacy Review Panel under section 609(b) of the Regulatory Flexibility Act as amended by SBREFA. The purpose of the Panel would be to collect the advice and recommendations of representatives of small entities that could be impacted by the eventual rule. If we determine that a panel is not warranted, we would intend to work on a less formal basis with those small entities identified.
Although we do not believe that this rule will have a significant economic impact on a substantial number of small entities, we are requesting information on small entities potentially impacted by this rulemaking. Information on company size, number of employees, annual revenues and product lines would be especially useful. Confidential business information may be submitted as described under
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private
As part of the development of our Notice of Proposed Rulemaking, we will examine the impacts of our proposal with respect to expected expenditures by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year.
Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism implications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”
Under Section 6 of Executive Order 13132, EPA may not issue a regulation that has federalism implications, that imposes substantial direct compliance costs, and that is not required by statute, unless the Federal government provides the funds necessary to pay the direct compliance costs incurred by State and local governments, or EPA consults with State and local officials early in the process of developing the proposed regulation. EPA also may not issue a regulation that has federalism implications and that preempts State law, unless the Agency consults with State and local officials early in the process of developing the proposed regulation.
Section 4 of the Executive Order contains additional requirements for rules that preempt State or local law, even if those rules do not have federalism implications (
As part of the development of our Notice of Proposed Rulemaking, we will examine the impacts of our proposal with respect to the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132.
In the spirit of Executive Order 13132, and consistent with EPA policy to promote communications between EPA and State and local governments, EPA specifically solicits comment on this proposed rule from State and local officials.
Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000), requires EPA to develop an accountable process to ensure “meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” “Policies that have tribal implications” is defined in the Executive Order to include regulations that have “substantial direct effects on one or more Indian tribes, on the relationship between the Federal government and the Indian tribes, or on the distribution of power and responsibilities between the Federal government and Indian tribes.”
As part of the development of our Notice of Proposed Rulemaking, we will examine the impacts of our proposal with respect to tribal implications.
Executive Order 13045, “Protection of Children From Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997) applies to any rule that: (1) Is determined to be “economically significant” as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If the regulatory action meets both criteria, the Agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alternatives considered by the Agency.
This rule is not subject to the Executive Order because it does not involve decisions on environmental health or safety risks that may disproportionately affect children. The EPA believes that the emissions reductions from the strategies proposed in this rulemaking will further improve air quality and will further improve children's health.
Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) requires that we determine whether or not there is a significant impact on the supply of energy caused by our rulemaking. These impacts include: Reductions in supply, reductions in production, increases in energy usage, increases in the cost of energy production and distribution, or other similarly adverse outcomes. We anticipate that our proposal will not be a “significant energy action” as defined by this order because we are not reducing the supply or production of any fuels or electricity, nor are we increasing the use or cost of energy by more than the stated thresholds. The
Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), Public Law 104 113, section 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless doing so would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (
As part of the development of our Notice of Proposed Rulemaking, we will examine the availability and use of voluntary consensus standards.
Executive Order 12898 (59 FR 7629 (Feb. 16, 1994)) establishes federal executive policy on environmental justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of their programs, policies, and activities on minority populations and low-income populations in the United States.
EPA has determined that this proposed rule will not have disproportionately high and adverse human health or environmental effects on minority or low-income populations because it increases the level of environmental protection for all affected populations without having any disproportionately high and adverse human health or environmental effects on any population, including any minority or low-income population. Rather the opposite as more low-income individuals tend to live closer to marine ports, and it is these areas that will receive the most benefits in this rule that will reduce emissions of large marine engines.
Reporting and recordkeeping requirements.
Environmental protection, Administrative practice and procedure, Air pollution control, Confidential business information, Imports, Incorporation by reference, Penalties, Reporting and recordkeeping requirements, Vessels, Warranties.
Securities and Exchange Commission.
Final rule.
We are adopting two exemptions from the registration requirements of the Securities Exchange Act of 1934 for compensatory employee stock options. The first exemption will be available to issuers that are not required to file periodic reports under the Exchange Act. The second exemption will be available to issuers that are required to file those reports because they have registered under Exchange Act Section 12 a class of security or are required to file reports pursuant to Exchange Act Section 15(d). The exemptions will apply only to the issuer's compensatory employee stock options and will not extend to the class of securities underlying those options.
Amy M. Starr, Senior Special Counsel to the Director, at (202) 551-3115, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549.
We are amending rule 12h-1
On July 5, 2007, we proposed amendments to Exchange Act Rule 12h-1 to provide two exemptions from Exchange Act Section 12(g)
In response to our request for comment on the Proposing Release, we received twelve comment letters from various persons, all of whom expressed support for the need for the proposed exemptions.
• Exemption for private, non-reporting issuers:
• Exemption for public reporting issuers:
In the 1980s, private, non-reporting issuers began using compensatory employee stock options
Securities Act Rule 701, which provides an exemption from Securities Act registration for non-reporting issuers for offerings of securities to employees, directors, consultants and advisors, and specified others, pursuant to written compensatory benefit plans or agreements, has given private issuers great flexibility in granting compensatory employee stock options to employees (and other eligible persons) at all levels.
Under Exchange Act Section 12(g), an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recently ended fiscal year must register that class of equity security, unless there is an available exemption from registration.
The addition of Section 12(g) to the Exchange Act in 1964 was intended “to extend to investors in certain over-the-counter securities the same protection now afforded to those in listed securities by providing that the issuers of certain securities now traded over the counter shall be subject to the same requirements that now apply to issuers of securities listed on an exchange.”
A number of private, non-reporting issuers faced with registration under Exchange Act Section 12(g) due solely to their compensatory employee stock options being held by 500 or more holders of record (as well as having more than $10 million in assets) at the end of their fiscal year have requested registration relief from our Division of Corporation Finance.
As we discussed further in the Proposing Release, we believe that it is appropriate at this time to adopt two new exemptions from the registration provisions of Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans that are limited to employees, directors, consultants, and advisors of the issuer, its parents, and majority-owned subsidiaries of the issuer or its parents.
We are adopting two amendments to Exchange Act Rule 12h-1 as proposed, with some modifications. These amendments will:
• Provide an exemption for private, non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans; and
• Provide an exemption from Exchange Act Section 12(g) registration for compensatory employee stock
Given the differences between issuers that are required to file periodic reports under the Exchange Act and those issuers that do not have such an obligation, including the nature of the trading markets and the amount of publicly available information, we believe that it is appropriate to adopt separate exemptions for these different types of issuers.
We believe it is appropriate to provide an exemption from Exchange Act registration, based on the factors identified in Exchange Act Section 12(h),
The amendment we are adopting today will provide an exemption from Exchange Act Section 12(g) registration for compensatory employee stock options of the following types of issuers:
• Issuers that do not have a class of securities registered under Exchange Act Section 12; and
• Issuers that are not subject to the reporting requirements of Exchange Act Section 15(d).
The exemption will be available only to those issuers that are not required to report under the Exchange Act. As such, the exemption will terminate once the issuer becomes subject to the reporting requirements of the Exchange Act. The exemption also will terminate if the issuer no longer satisfies the conditions to the exemption.
The exemption for compensatory employee stock options will:
• Apply only to compensatory employee stock options that are issued under a written compensatory stock option plan
• Apply to all compensatory employee stock options issued under all written compensatory stock option plans on a combined basis where the securities underlying the compensatory employee stock options are of the same class of securities of the issuer, with the exemptive conditions applying to the compensatory employee stock options issued under each option plan; and
• Not extend to any class of securities received or to be received on exercise of the compensatory employee stock options.
The exemption covers all compensatory employee stock options meeting the conditions of the exemption, even if the compensatory employee stock options are issued under separate written option plans of the issuer, its parents, or majority-owned subsidiaries of the issuer or its parents.
The exemption, as adopted, applies to the compensatory employee stock options only and not to the securities issued (or to be issued) on exercise of the compensatory employee stock options. Thus, the issuer will have to apply the registration requirements of Exchange Act Section 12 to the class of equity security underlying the compensatory employee stock options without regard to the exemption.
The exemption is available only where the class of persons eligible to receive compensatory employee stock options under the stock option plans is limited to those persons described in the exemption. These eligible optionholders are the same as those participants permitted under Securities Act Rule 701 and include:
• Employees of the issuer, its parents, or majority-owned, direct or indirect, subsidiaries of the issuer or its parents;
• Directors of the issuer, its parents, or majority-owned, direct or indirect, subsidiaries of the issuer or its parents; and
• Consultants and advisors of the issuer, its parents, or majority-owned, direct or indirect, subsidiaries of the issuer or its parents.
As adopted, the exemption is limited to those situations where compensatory employee stock options may be held only by those persons who are permitted to hold or be granted compensatory employee stock options under Securities Act Rule 701 and their permitted transferees.
Just as Securities Act Rule 701 was designed specifically not to be available for capital-raising transactions, the exemption will apply only to employee stock options issued for compensatory purposes. The restrictions on the eligible participants in the stock option plans are intended to assure that the exemption is limited to employee stock options issued solely for compensatory purposes.
The exemption is available only where there are certain restrictions on the transferability by an optionholder of those options and, prior to the exercise of the options, the shares issuable on exercise of those options.
• The compensatory employee stock options and, prior to exercise, the shares to be received on exercise of those options cannot be transferred except, as permitted by the exemption:
• There can be no other permitted pledges, gifts, hypothecations, or other transfers of the compensatory employee stock options, or shares issuable on exercise of those options, prior to exercise, until the issuer becomes subject to the reporting requirements of the Exchange Act or is no longer relying on the exemption; provided that there may be:
• The compensatory employee stock options or the securities issuable upon exercise of those options cannot be the subject of a short position, a “put equivalent position”
As adopted, the conditions provide that, except with regard to the limited
The restrictions on transfer of the compensatory employee stock options and the shares underlying those options, prior to exercise, are intended to limit the possibility for a trading market to develop for the compensatory employee stock options while the issuer is relying on the exemption. These restrictions also are intended to assure that an optionholder is not able to profit from the compensatory employee stock options or the securities to be received on exercise of those options (except from permitted payments or transfers as described in the exemption), until the issuer becomes subject to the reporting requirements of the Exchange Act or is no longer relying on the exemption.
In response to comments, we have modified the transferability condition to permit optionholders to receive compensation for their options from the issuer or arising from a change of control or other acquisition transaction after which the options no longer will be outstanding and the issuer no longer will be relying on the exemption.
Commenters also were concerned that a requirement for an issuer to repurchase the shares or options due to state law limitations on transfer restrictions could have adverse accounting consequences to companies.
We proposed that the transferability restrictions apply to holders of shares issued on exercise of the options. In response to comments,
We are not adopting as a condition to the exemption separate transferability restrictions on holders of the shares received on exercise of the compensatory employee stock options. While we acknowledged in the Proposing Release the existence of company-imposed and securities law transferability restrictions, we are persuaded to modify the exemption in light of the additional concerns that commenters believed the proposed transferability restrictions would raise. In modifying the exemption, we have considered the treatment of compensatory employee stock options under Securities Act Rule 701 as restricted securities as defined in Securities Act Rule 144,
We also are not adopting the proposed restriction on other shares of the same class of equity security as those underlying the options. We believe that this restriction is no longer necessary because we have not adopted transferability restrictions on holders of securities received on exercise of compensatory employee stock options. In addition, we have taken into account one commenter's concern that the transferability restrictions on the optionholder with respect to shares of the same class as those issuable on exercise of the options would affect an optionholder's ability to dispose of other securities of the issuer that the optionholder owned.
As proposed, the exemption would have provided that there could be no market, process, or methodology that would permit optionholders, prior to exercise, to receive compensation or consideration for their options, the shares issuable on exercise of the options, or shares of the same class of equity security as those underlying those options. Commenters noted that generally there is no market for the securities underlying the options while
The exemption will not require that there be any restriction on the timing of the exercise of the compensatory employee stock options:
• By the optionholder (regardless of whether the optionholder continues to be an employee, director, consultant or advisor of the issuer);
• In the event of the death or disability of the optionholder, by the estate or guardian of the optionholder; or
• By a family member (as defined in Securities Act Rule 701) who acquired the options through a gift or domestic relations order.
We are adopting the proposed requirement that the issuer provide information to optionholders with certain modifications. In response to comment, we are not adopting a requirement for issuers to provide information to holders of shares received on exercise of compensatory employee stock options after exercise or for issuers to provide optionholders access to their books and records.
As adopted, the information condition will require the issuer, for purposes of the exemption, to periodically provide the following information to optionholders:
• The same risk and financial information that would be required to be provided under Securities Act Rule 701 if securities sold in reliance on Securities Act Rule 701 in a 12-month period exceeded $5 million (as such provision may be modified
The issuer will be permitted to provide the required information to the optionholders either by:
• Physical or electronic
• Notice to the optionholders of:
In Securities Act Rule 701, we established the type of information that employees holding compensatory employee stock options must be provided before the exercise of those options.
Securities Act Rule 701 provides that the required information must be provided to an optionholder a reasonable period of time before the date of exercise of the compensatory employee stock options. Securities Act Rule 701 also requires that the required financial statements be as of a date no more than 180 days before the sale of the securities (which in the case of compensatory employee stock options is the date of exercise of the options). We believe that the exemption from Exchange Act registration presents the need for ongoing information to be provided to optionholders. As such, the exemption requires that, once an issuer has 500 or more optionholders, the optionholders must be provided every six months the required information, including financial statements that are not more than 180 days old.
We believe that our experience with Securities Act Rule 701 and the combined conditions of the exemption, including the eligibility and transferability provisions, make it appropriate to require the same risk and financial information as required under Securities Act Rule 701, as noted above, rather than essentially the same
One commenter objected to the proposed condition that the issuer make its books and records available for inspection by the optionholder and holders of shares received on exercise of compensatory employee stock options to the same extent that they are available to other shareholders of the issuer.
To permit issuers to safeguard proprietary or confidential information that may be contained in the information to be provided, the exemption will permit provision of the disclosure to be conditioned on the optionholder agreeing to maintain the confidentiality of the information.
The proposal also would have required that the issuer provide the required information to holders of shares received on exercise of options. We have revised the information condition to apply only to optionholders in light of concern regarding the potential misuse of information by non-employees or former employees of a company.
We are adopting essentially as proposed the requirement that, for the exemption to be available, a private, non-reporting issuer must include the necessary limitations and conditions in the written stock option plans, within the terms of the individual written option agreements, or in another enforceable written agreement. Some commenters were concerned about the need to include the conditions and obligations in option plans or option agreements and one commenter suggested that the conditions and restrictions should only have to be satisfied in practice.
To provide certainty regarding the obligations of issuers that already have registered securities under the Exchange Act or are required to file reports under the Exchange Act pursuant to Exchange Act Section 15(d), we are adopting an exemption from Exchange Act registration for compensatory employee stock options of these reporting issuers.
As with the exemption for private, non-reporting issuers, the exemption for issuers subject to the reporting requirements of the Exchange Act will be available only where the options are issued pursuant to a written compensatory stock option plan. We have revised the exemption, in response to comment,
We also have modified the optionholder eligibility condition to address the concerns of some commenters that the exemption still should be available to reporting issuers even where a small number of optionholders may not necessarily fall within the permitted categories of optionholders.
The exemption from Section 12(g) registration for compensatory employee stock options of Exchange Act reporting issuers does not include any information conditions, other than those arising from the registration of a class of security under the Exchange Act or arising under Exchange Act Section 15(d).
We are not conditioning the availability of the exemption on the issuer being current in its Exchange Act reporting. As we noted in the proposing release, we believe it would seem inappropriate for the issuer to lose the exemption, and be required to register a class of compensatory employee stock options under Exchange Act Section 12(g), because it was late in filing a required Exchange Act report and, for the days before that report was filed, was not “current” in its Exchange Act reporting. One commenter agreed with this approach.
While we had proposed that the exemption apply only where the issuers had registered the class of equity security underlying the compensatory employee stock options, which would provide optionholders the protections of Exchange Act Sections 13(e)
We believe that once an issuer has 500 or more optionholders it is more likely that it will have 500 or more holders of the shares underlying the options and therefore will be required to register that class under Exchange Act Section 12 if it also has more than $10 million in assets. In addition, if the issuer becomes a private, non-reporting issuer due to the suspension or termination of its reporting obligation, it may rely on the exemption for the compensatory employee stock options of private, non-reporting issuers if the conditions to that exemption are satisfied.
If a private, non-reporting issuer becomes ineligible to rely on the exemption, the issuer will be permitted up to 120 calendar days from the date it became ineligible to rely on the exemption to file a registration statement to register under Exchange Act Section 12(g) the class of compensatory employee stock options. For a reporting issuer that becomes ineligible to rely on the exemption, the issuer will be permitted up to 60 calendar days from the date it became ineligible to rely on the exemption to file a registration statement to register under Exchange Act Section 12(g) the class of compensatory employee stock options or a class of security. We have revised the transition provision for private, non-reporting issuers in response to a commenter's concern that 60 days would not be sufficient for private, non-reporting issuers to prepare a Form 10 registration statement including audited financial statements.
Certain provisions of the amendments to Exchange Act Rule 12h-1
• Exchange Act Rule 12h-1.
The hours and costs associated with preparation of notices, maintaining Internet sites, and preparation of information to be disclosed to optionholders for private, non-reporting issuers relying on the exemption from Exchange Act Section 12(g)
The exemptions from Exchange Act Section 12(g) registration are being adopted pursuant to the Exchange Act. The information collection requirements related to the exemption for private, non-reporting issuers are a condition to reliance on the exemption. There is no mandatory retention period for the information disclosed and the information disclosed is not required to be filed with the Commission.
Our amendments to Exchange Act Rule 12h-1 will provide an exemption for private, non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans. The amendments also will provide an exemption from Exchange Act Section 12(g) registration for compensatory employee stock options of issuers that are subject to the periodic reporting requirements of the Exchange Act pursuant to Exchange Act Section 13 or Section 15(d).
The requirements regarding notice of information availability, Internet availability of information, and, for certain issuers, the preparation of information related to the exemption from Exchange Act Section 12(g) for compensatory employee stock options of private, non-reporting issuers constitute a new collection of information under the Exchange Act. The information provision in the exemption for private, non-reporting issuers is not a new collection of information for those private, non-reporting issuers that also are required to provide such information to optionholders pursuant to Securities Act Rule 701
The collection of information is required for those private, non-reporting issuers that rely on the exemption because they had 500 or more optionholders and more than $10 million in assets at the end of their fiscal year. The issuers likely to use the exemption are those private, non-reporting issuers that had more than $10 million in assets and had used stock options to compensate employees, directors, consultants, and advisors on a broad basis. The exemption from Section 12(g) registration for compensatory employee stock options of reporting issuers that are subject to the periodic reporting requirements of the Exchange Act pursuant to Exchange Act Section 13 or Section 15(d) does not impose any new collection of information on these reporting issuers.
None of the commenters addressed our request for comment on the PRA analysis and, accordingly, we have not revised our PRA estimates.
For purposes of the PRA, we estimate that the annual burden for responding to the collection of information in the exemption will not increase significantly for most private, non-reporting issuers, due to the current disclosure provisions of Securities Act Rule 701 and the probability that such issuers already prepare such information for other purposes. The costs may increase for those private, non-reporting issuers who are not relying on Securities Act Rule 701 when they grant compensatory employee stock options or who do not prepare the information for other purposes. The cost of providing such information may increase because of the requirement in the exemption for private, non-reporting issuers to provide the required information.
Our estimates represent the burden for private, non-reporting issuers eligible to rely on the exemption. Because the registration provisions of Exchange Act Section 12(g) apply only to an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recently ended fiscal year, only those private, non-reporting issuers satisfying those thresholds will be subject to the collection of information. The Division of Corporation Finance has granted no-action relief from registration of compensatory employee stock options to 30 private, non-reporting issuers during the period 1992 through 2006. If we assume that approximately 3 new private, non-reporting issuers will be relying on the exemption each year and that a certain number of private, non-reporting issuers will no longer be relying on the exemption because they have become reporting issuers, have been acquired, or have terminated business, we estimate that approximately 40 private, non-reporting issuers each year may be relying on the exemption. The exemption for private, non-reporting issuers would terminate once such issuer became subject to the reporting requirements of the Exchange Act or was no longer relying on the exemption. Thus, the number of private, non-reporting issuers that may rely on the exemption may vary from year to year.
For purposes of the PRA, we estimate the annual paperwork burden for private, non-reporting issuers desiring to rely on the exemption and to comply with our collection of information requirements to be approximately 20 hours of in-house issuer personnel time and to be approximately $24,000 for the services of outside professionals.
We estimate that 25% of the burden of preparation and provision of the information required by the exemption is carried by the issuer internally and that 75% of the burden is carried by outside professionals retained by the issuer at an average cost of $400 per hour.
Compensatory stock options provide a method to use non-cash compensation to attract, retain, and motivate issuer employees, directors and consultants. Since the 1990s, a number of private, non-reporting issuers have granted
Stock options, including stock options issued to employees under stock option plans, are a separate class of equity security for purposes of the Exchange Act. Under Exchange Act Section 12(g), an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recently ended fiscal year must register that class of equity security, unless there is an available exemption from registration. While there is an exemption from Exchange Act Section 12(g) registration for interests and participations in certain other types of employee compensation plans involving securities, currently there is no exemption for compensatory employee stock options.
We are adopting two exemptions from the registration provisions of Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans that are limited to employees, directors, consultants, and advisors of the issuer.
One amendment to Exchange Act Rule 12h-1 will provide an exemption from Exchange Act Section 12(g) registration for compensatory employee stock options of an issuer that does not have a class of securities registered under Exchange Act Section 12 and is not subject to the reporting requirements of Exchange Act Section 15(d), where the following conditions are present:
• Eligible optionholders are limited to employees, directors, consultants, and advisors of the issuer, its parents, or majority-owned subsidiaries of the issuer or its parents and permitted transferees;
• Transferability by optionholders of compensatory employee stock options and, prior to exercise, the shares to be received on exercise of those options is restricted; and
• Risk and financial information is provided to optionholders that is of the type that would be required under Securities Act Rule 701 if securities sold in reliance on Securities Act Rule 701 exceeded $5 million in a 12-month period.
The second amendment to Exchange Act Rule 12h-1 will provide an exemption for compensatory employee stock options of issuers that are required to file reports under the Exchange Act pursuant to Exchange Act Section 13 or Exchange Act Section 15(d).
Benefits of the exemption for private, non-reporting issuers are likely to include the following: (1) Lower costs to, and reduced uncertainty for, private, non-reporting issuers desiring relief from registration under Section 12(g) for compensatory employee stock options issued to employees, directors, consultants, and advisors for compensatory purposes; (2) benefits to private, non-reporting issuers in designing and implementing employee stock option plans without regard to concerns arising from Exchange Section 12(g) registration of the compensatory employee stock options; (3) benefits to private, non-reporting issuers arising from the use of electronic or Internet-based methods of providing the information necessary to satisfy the information requirement of the exemption; and (4) benefits to optionholders of private, non-reporting issuers arising from the required provision of information under the exemption.
Private, non-reporting issuers would benefit from cost savings as a result of the exemption from Section 12(g) registration of their compensatory employee stock options. A number of private, non-reporting issuers that have 500 or more optionholders and assets in excess of $10 million have hired attorneys and requested no-action relief from the Division of Corporation Finance with regard to the registration of the options. The conditions to no-action relief from the Division include information provision conditions that are more extensive than in the exemption. The exemption, which is available if the provisions of the exemption are satisfied, will reduce the legal and other costs to a private, non-reporting issuer arising from the no-action request and relief. Such cost savings include reduced legal and accounting fees arising from both the request for no-action relief and for preparation of reports equivalent to Exchange Act reports of a reporting issuer on an ongoing basis. Because we expect that a number of the issuers that may take advantage of the exemption may be smaller issuers, these cost savings could be significant relative to revenues.
The amendments require the same information that the issuer otherwise would be required to provide if securities sold in reliance on Securities Act Rule 701 exceeded $5 million during any consecutive 12-month period. Thus, for private, non-reporting issuers with a significant number of optionholders (and with more than $10 million in assets at the end of its fiscal year), it is likely that such issuer either already is obligated to provide the same information to optionholders due to sales of securities in reliance on Securities Act Rule 701, or already prepares and, as such, provides such information to its shareholders.
The amendment also will benefit private, non-reporting issuers by providing the less expensive alternative of electronic or Internet-based methods of providing the information necessary to satisfy the information requirement of the exemption.
Private, non-reporting issuers also will benefit from the certainty that the exemption will provide in designing and implementing compensation programs and employee stock option plans. The amendments identify the eligibility provisions and transfer restrictions that need to be contained in compensatory stock option plans or other written agreements, thereby lessening the need for issuers, at the time that Section 12(g) registration relief is needed for the compensatory employee stock options, to amend their stock option plans and outstanding options to include provisions that would be necessary to obtain no-action relief. The exemption will help private, non-reporting issuers avoid becoming subject to the registration and reporting requirements of the Exchange Act prior to the time they have public shareholders.
Optionholders also will benefit from the exemption. The exemption assures the provision of the information every six months, including financial information that is not more than 180 days old, to optionholders. Employees, directors, consultants, and advisors would benefit from the exemption because private, non-reporting issuers will be able to use options for compensatory purposes without concern that the option grants will subject the issuer to Exchange Act registration.
The exemption for reporting issuers also will benefit optionholders and holders of shares received on exercise of
Issuers will be required to satisfy the provisions of the amendments to avoid registering under Exchange Act Section 12(g) their compensatory employee stock options if the registration thresholds are met at the end of the issuer's fiscal year. Private, non-reporting issuers may incur certain costs to rely on the exemption including (1) costs to amend their existing employee stock option plans if the plans and option grants do not contain the restrictive and information provisions of the exemption; (2) costs arising from preparing and providing the information required by the exemption to the extent that the issuer does not already prepare or provide such information for other purposes; and (3) costs of maintaining an Internet site on which the information may be available if the issuer chooses to use that method to provide the required information to optionholders.
We believe that the provisions of the exemption are consistent in many respects with the restrictive provisions of other laws and rules governing option grants and, thus, the costs to private, non-reporting issuers should not be increased. The exemption provisions also are consistent with or are more flexible than the existing conditions for obtaining no-action relief from the Division of Corporation Finance. Therefore, the costs to private, non-reporting issuers to prepare the information required by the exemption may be the same or less than the current costs to the issuer relying on registration relief provided in a no-action letter issued by the Division of Corporation Finance.
Those private, non-reporting issuers who do not already prepare the required information will face costs if they desire to avail themselves of the exemption. In addition to the costs discussed in the Paperwork Reduction Act analysis,
Private, non-reporting issuers may incur costs in providing the information required under the exemption. These costs may include printing and sending the information or making the information available on an Internet site.
The Division of Corporation Finance has granted no-action relief from registration of compensatory employee stock options to 30 private, non-reporting issuers during the period 1992 through 2006. If we assume that approximately 3 new private, non-reporting issuers will be relying on the exemption each year and that a certain number of private, non-reporting issuers will no longer be relying on the exemption because they have become reporting issuers, have been acquired, or have terminated business, we estimate that approximately 40 private, non-reporting issuers each year may be relying on the exemption. The exemption for private, non-reporting issuers will terminate once such issuer becomes subject to the reporting requirements of the Exchange Act or is no longer relying on the exemption. Thus, the number of private, non-reporting issuers that may rely on the exemption may vary from year to year.
For purposes of the Paperwork Reduction Act, we have estimated that the annual paperwork burden for private, non-reporting issuers desiring to rely on the exemption and to comply with our collection of information requirements to be approximately 20 hours of in-house issuer personnel time, which is equivalent to $3,500, and to be approximately $24,000 for the services of outside professionals, for a total paperwork burden cost of $27,500.
Although a private, non-reporting issuer relying on the exemption will benefit from cost savings associated with not having to register the compensatory employee stock options as a separate class of equity security under the Exchange Act, or obtaining no-action relief, by not doing so, an optionholder will not have the benefit of the disclosures contained in Exchange Act reports that the issuer otherwise would be obligated to file with us, including audited financial statements, or the disclosures required to be provided under the terms of the no-action relief.
Optionholders also will not be able to freely sell their options while the private, non-reporting issuer is relying on the exemption. Optionholders will not be able realize value from the options or, prior to exercise of the options, the shares to be issued on exercise of the options until after the private, non-reporting issuer becomes subject to the reporting requirements of the Exchange Act or is not relying on the exemption, other than as a result of certain permitted transfers. Many private, non-reporting issuers that grant options, however, currently restrict the transfer of securities held by holders of shares received on exercise of options, in most cases until after the issuer becomes subject to the reporting requirements of the Exchange Act or unless the issuer is acquired by another entity. In some cases, private, non-reporting issuers retain the right to repurchase options or shares received on exercise of an option. Any exercise of such repurchase right by the issuer would be a cost to such issuer.
Section 23(a)(2)
We expect that the exemption for private, non-reporting issuers from Exchange Act registration of compensatory employee stock options will provide necessary certainty to those issuers in their compensation decisions and will help them avoid becoming subject to the registration and reporting requirements of the Exchange Act prior to the time they have public shareholders. We anticipate that the exemption would save such private, non-reporting issuers costs and will not require that companies make their confidential issuer information public prior to the issuer voluntarily determining to become a public reporting issuer or being required to register a class of equity security under the Exchange Act. Further, we anticipate that the exemption will continue to provide private, non-reporting issuers freedom to determine appropriate methods of compensating their employees, directors, consultants, and advisors without concern that they will be required to register their compensatory employee stock options as a class of equity security under Exchange Act Section 12. Thus, the exemption eliminates a possible disincentive for issuers to use certain compensatory employee stock options. This may be a benefit if this type of compensation is useful in attracting and retaining qualified employees that increase the private, non-reporting issuer's competitiveness.
The exemption for reporting issuers will provide certainty regarding the obligations of issuers that already are subject to the reporting requirements of the Exchange Act pursuant to Exchange Act Section 13 or Exchange Act Section 15(d) to register their compensatory employee stock options under the Exchange Act. In addition, in the case of these reporting issuers, the optionholders would have access to the issuer's publicly filed Exchange Act reports and, if the issuer has registered under Exchange Act Section 12 the class of equity security underlying the options, the appropriate provisions of Sections 13 and 14 would apply to the compensatory employee stock options and the equity securities issuable on exercise of those options.
Section 3(f)
We believe that the exemption from Exchange Act registration for the compensatory stock options may beneficially affect the issuer's ability to compete for employees because it will allow such issuers to continue to use employee stock options in their compensation programs, thus enabling them to compete for such employees with both private, non-reporting issuers and public reporting issuers. The exemption also will provide an eligible issuer a more efficient, available exemption from Exchange Act Section 12(g) registration of compensatory employee stock options, instead of such issuer having to seek no-action relief or an exemptive order under Exchange Act Section 12(h).
The exemptions do not relate to or affect capital formation, as the compensatory employee stock options covered by the exemptions are issued for compensatory and not capital raising purposes.
The exemptions will allow eligible issuers to continue to have freedom to determine appropriate methods of compensating their employees, directors, consultants, and advisors. For private, non-reporting issuers, these compensation decisions could be made without concern that the issuer will become subject to the Exchange Act reporting requirements before they have public shareholders.
The Commission hereby certifies pursuant to 5 U.S.C. 605(b) that the two exemptions from the registration provisions of Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans that are limited to employees, directors, consultants, and advisors of the issuer, its parents, and the majority-owned subsidiaries of the issuer or its parents will not have a significant economic impact on a substantial number of small entities. We prepared an Initial Regulatory Flexibility Act Analysis in which we stated that the proposed exemption would not affect issuers that are small entities because small entities do not satisfy the asset threshold of Section 12(g) and therefore the exemptions would not be needed by such entities until their asset size increased to more than $10 million at the end of a fiscal year. We stated, therefore, that there may not be a large number of small entities that may be impacted. Because we received no comment disagreeing with that conclusion we are certifying that the two exemptions will not have a significant economic impact on a substantial number of small entities.
Section 553(d) of the Administrative Procedure Act generally provides that, unless an exception applies, a substantive rule may not be made effective less than 30 days after notice of the rule has been published in the
We are amending Exchange Act Rule 12h-1 under the authority in Sections 12, 23, and 36 of the Exchange Act, as amended.
Reporting and recordkeeping requirements, Securities.
15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78
(f)(1) Stock options issued under written compensatory stock option plans under the following conditions:
(i) The issuer of the equity security underlying the stock options does not have a class of security registered under section 12 of the Act and is not required to file reports pursuant to section 15(d) of the Act;
(ii) The stock options have been issued pursuant to one or more written compensatory stock option plans established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parents;
All stock options issued under all written compensatory stock option plans on the same class of equity security of the issuer will be considered part of the same class of equity security for purposes of the provisions of paragraph (f) of this section.
(iii) The stock options are held only by those persons described in Rule 701(c) under the Securities Act (17 CFR 230.701(c)) or their permitted transferees as provided in paragraph (f)(1)(iv) of this section;
(iv) The stock options and, prior to exercise, the shares to be issued on exercise of the stock options are restricted as to transfer by the optionholder other than to persons who are family members (as defined in Rule 701(c)(3) under the Securities Act (17 CFR 230.701(c)(3)) through gifts or domestic relations orders, or to an executor or guardian of the optionholder upon the death or disability of the optionholder until the issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Act or is no longer relying on the exemption pursuant to this section; provided that the optionholder may transfer the stock options to the issuer, or in connection with a change of control or other acquisition transaction involving the issuer, if after such transaction the stock options no longer will be outstanding and the issuer no longer will be relying on the exemption pursuant to this section;
For purposes of this section, optionholders may include any permitted transferee under paragraph (f)(1)(iv) of this section; provided that such permitted transferees may not further transfer the stock options..
(v) The stock options and the shares issuable upon exercise of such stock options are restricted as to any pledge, hypothecation, or other transfer, including any short position, any “put equivalent position” (as defined in § 240.16a-1(h) of this chapter), or any “call equivalent position” (as defined in § 240.16a-1(b) of this chapter) by the optionholder prior to exercise of an option, except in the circumstances permitted in paragraph (f)(1)(iv) of this section, until the issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Act or is no longer relying on the exemption pursuant paragraph (f)(1) of this section; and
The transferability restrictions in paragraphs (f)(1)(iv) and (f)(1)(v) of this section must be contained in a written compensatory stock option plan, individual written compensatory stock option agreement, other stock purchase or stockholder agreement to which the issuer and the optionholder are a signatory or party, other enforceable agreement by or against the issuer and the optionholder, or in the issuer's by-laws or certificate or articles of incorporation.
(vi) The issuer has agreed in the written compensatory stock option plan, the individual written compensatory stock option agreement, or another agreement enforceable against the issuer to provide the following information to optionholders once the issuer is relying on the exemption pursuant to paragraph (f)(1) of this section until the issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Act or is no longer relying on the exemption pursuant paragraph (f)(1) of this section:
The information described in Rules 701(e)(3), (4), and (5) under the Securities Act (17 CFR 230.701(e)(3), (4), and (5)), every six months with the financial statements being not more than 180 days old and with such information provided either by physical or electronic delivery to the optionholders or by written notice to the optionholders of the availability of the information on an Internet site that may be password-protected and of any password needed to access the information.
The issuer may request that the optionholder agree to keep the information to be provided pursuant to this section confidential. If an optionholder does not agree to keep the information to be provided pursuant to this section confidential, then the issuer is not required to provide the information.
(2) If the exemption provided by paragraph (f)(1) of this section ceases to be available, the issuer of the stock options that is relying on the exemption provided by this section must file a registration statement to register the class of stock options under section 12 of the Act within 120 calendar days after the exemption provided by paragraph (f)(1) of this section ceases to be available; and
(g)(1) Stock options issued under written compensatory stock option plans under the following conditions:
(i) The issuer of the equity security underlying the stock options has registered a class of security under section 12 of the Act or is required to file periodic reports pursuant to section 15(d) of the Act;
(ii) The stock options have been issued pursuant to one or more written compensatory stock option plans established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer's parents;
All stock options issued under all of the written compensatory stock option plans on the same class of equity security of the issuer will be considered part of the same class of equity
(iii) The stock options are held only by those persons described in Rule 701(c) under the Securities Act (17 CFR 230.701(c)) or those persons specified in General Instruction A.1(a) of Form S-8 (17 CFR 239.16b); provided that an issuer can still rely on this exemption if there is an insignificant deviation from satisfaction of the condition in this paragraph (g)(1)(iii) and after December 7, 2007 the issuer has made a good faith and reasonable attempt to comply with the conditions of this paragraph (g)(1)(iii). For purposes of this paragraph (g)(1)(iii), an insignificant deviation exists if the number of optionholders that do not meet the condition in this paragraph (g)(1)(iii) are insignificant both as to the aggregate number of optionholders and number of outstanding stock options.
(2) If the exemption provided by paragraph (g)(1) of this section ceases to be available, the issuer of the stock options that is relying on the exemption provided by this section must file a registration statement to register the class of stock options or a class of security under section 12 of the Act within 60 calendar days after the exemption provided in paragraph (g)(1) of this section ceases to be available.
By the Commission.