[Federal Register Volume 79, Number 84 (Thursday, May 1, 2014)]
[Proposed Rules]
[Pages 24596-24618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09357]
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DEPARTMENT OF TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID OCC-2014-0008]
RIN 1557-AD81
FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Regulation Q; Docket No. R-1487]
RIN 7100-AD AD16
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AE12
Regulatory Capital Rules: Regulatory Capital, Proposed Revisions
to the Supplementary Leverage Ratio
AGENCIES: Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; and the Federal
Deposit Insurance Corporation.
ACTION: Proposed rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
issuing a notice of proposed rulemaking (proposed rule) that would
revise the denominator of the supplementary leverage ratio (total
leverage exposure) that the agencies adopted in July 2013 as part of
comprehensive revisions to the agencies' regulatory capital rules (2013
revised capital rule). Specifically, the proposed rule would revise the
treatment of on- and off-balance sheet exposures for purposes of
determining total leverage exposure, and more closely align the
agencies' rules on the calculation of total leverage exposure with
international leverage ratio standards.
The proposed rule would incorporate in total leverage exposure the
effective notional principal amount of credit derivatives and other
similar instruments through which a banking organization provides
credit protection (sold credit protection), modify the calculation of
total leverage exposure for derivatives and repo-style transactions,
and revise the credit conversion factors (CCFs) applied to certain off-
balance sheet exposures. The proposed rule also would make changes to
the methodology for calculating the supplementary leverage ratio and to
the public disclosure requirements for the supplementary leverage
ratio.
The proposed rule would apply to all banks, savings associations,
bank holding companies, and savings and loan holding companies (banking
organizations) that are subject to the agencies' advanced approaches
risk-based capital rules (advanced approaches banking organizations),
as defined in the 2013 revised capital rule, including advanced
approaches banking organizations that are subject to the enhanced
supplementary leverage ratio standards that the agencies have adopted
in final form and published elsewhere in today's Federal Register (the
eSLR standards). Consistent with the 2013 revised capital rule,
advanced approaches banking organizations will be required to disclose
their supplementary leverage ratios beginning January 1, 2015, and will
be required to comply with a minimum supplementary leverage ratio
capital requirement of 3 percent and, as applicable, the eSLR standards
beginning January 1, 2018. The agencies are seeking comment on all
aspects of the proposed rule.
DATES: Comments must be received no later than June 13, 2014.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Regulatory Capital Rules: Regulatory Capital, Proposed
Revisions to the Supplementary Leverage Ratio'' to facilitate the
organization and distribution of the comments. You may submit comments
by any of the following methods:
Federal eRulemaking Portal--``regulations.gov'': Go to
http://www.regulations.gov. Enter ``Docket ID OCC-2014-0008'' in the
Search Box and click ``Search''. Results can be filtered using the
filtering tools on the left side of the screen. Click on ``Comment
Now'' to submit public comments.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Email: [email protected].
Mail: Legislative and Regulatory Activities Division,
Office of the Comptroller of the Currency, 400 7th Street SW., Suite
3E-218, Mail Stop 9W-11, Washington, DC 20219.
[[Page 24597]]
Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218,
Mail Stop 9W-11, Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2014-0008'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2014-0008'' in the Search
box and click ``Search''. Comments can be filtered by Agency using the
filtering tools on the left side of the screen.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
viewing public comments, viewing other supporting and related
materials, and viewing the docket after the close of the comment
period.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 649-
6700. Upon arrival, visitors will be required to present valid
government-issued photo identification and to submit to security
screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: When submitting comments, please consider submitting your
comments by email or fax because paper mail in the Washington, DC area
and at the Board may be subject to delay. You may submit comments,
identified by Docket No. R-1487 RIN AE-16, by any of the following
methods:
Agency Web site:http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert de V. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street NW., Washington, DC 20551) between 9:00 a.m. and 5:00 p.m. on
weekdays.
FDIC: You may submit comments, identified by RIN 3064-AE12, by any
of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on the Agency
Web site.
Email: [email protected]. Include the RIN 3064-AE12 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7:00 a.m. and 5:00 p.m.
Public Inspection: All comments received must include the agency
name and RIN 3064-AE12 for this rulemaking. All comments received will
be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 by telephone at (877) 275-3342 or (703) 562-2200.
FOR FURTHER INFORMATION CONTACT: OCC: Roger Tufts, Senior Economic
Advisor, (202) 649-6981; or Nicole Billick, Risk Expert, (202) 649-
7932, Capital Policy; or Carl Kaminski, Counsel; or Henry Barkhausen,
Attorney, Legislative and Regulatory Activities Division, (202) 649-
5490, Office of the Comptroller of the Currency, 400 7th Street SW.,
Washington, DC 20219.
Board: Constance M. Horsley, Assistant Director, (202) 452-5239;
Thomas Boemio, Manager, (202) 452-2982; or Sviatlana Phelan, Senior
Financial Analyst, (202) 912-4306, Capital and Regulatory Policy,
Division of Banking Supervision and Regulation; or Benjamin McDonough,
Senior Counsel, (202) 452-2036; April C. Snyder, Senior Counsel, (202)
452-3099; or Mark Buresh, Attorney, (202) 452-5270, Legal Division,
Board of Governors of the Federal Reserve System, 20th and C Streets
NW., Washington, DC 20551. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: George French, Deputy Director, [email protected]; Bobby R.
Bean, Associate Director, [email protected]; Ryan Billingsley, Chief,
Capital Policy Section, [email protected]; Karl Reitz, Chief,
Capital Markets Strategies Section, [email protected]; Capital Markets
Branch, Division of Risk Management Supervision,
[email protected] or (202) 898-6888; or Mark Handzlik,
Counsel, [email protected]; Michael Phillips, Counsel,
[email protected]; or Rachel Ackmann, Attorney, [email protected];
Supervision Branch, Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
In 2013, the Office of the Comptroller of the Currency (OCC), the
Board of Governors of the Federal Reserve System (Board), and the
Federal Deposit Insurance Corporation (FDIC) (collectively, the
agencies) comprehensively revised and strengthened the capital
regulations applicable to banking organizations (2013 revised capital
rule). The 2013 revised capital rule included a new minimum
supplementary leverage ratio requirement of 3 percent.\1\ The
supplementary leverage ratio applies to banking organizations that are
subject to the agencies' advanced approaches risk-based capital rules
(advanced approaches banking organizations), as defined in the 2013
revised capital rule,
[[Page 24598]]
and is the arithmetic mean of the ratio of tier 1 capital to total
leverage exposure calculated as of the last day of each month in the
reporting quarter.
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\1\ The Board and the OCC published a joint final rule in the
Federal Register on October 11, 2013 (78 FR 62018) and the FDIC
published a substantially identical interim final rule on September
10, 2013 (78 FR 55340).
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The supplementary leverage ratio included in the 2013 revised
capital rule is generally consistent with the international leverage
ratio introduced by the Basel Committee on Banking Supervision (BCBS)
in 2010 (Basel III leverage ratio).\2\ The agencies indicated in the
preamble to the 2013 revised capital rule that they would consider
revising the supplementary leverage ratio to take into account
subsequent changes made by the BCBS to the Basel III leverage ratio.
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\2\ See BCBS, ``Basel III: A Global Regulatory Framework for
More Resilient Banks and Banking Systems'' (December 2010 and
revised in June 2011), available at http://www.bis.org/publ/bcbs189.htm. The BCBS is a committee of banking supervisory
authorities, which was established by the central bank governors of
the G-10 countries in 1975. More information regarding the BCBS and
its membership is available at http://www.bis.org/bcbs/about.htm.
Documents issued by the BCBS are available through the Bank for
International Settlements Web site at http://www.bis.org.
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In January 2014, the BCBS adopted revisions to the Basel III
leverage ratio, which include the recognition in the denominator of the
effective notional principal amount of credit derivatives or similar
instruments through which a banking organization provides credit
protection, modifications to the measure of exposure for derivatives
and repo-style transactions, and revisions to the credit conversion
factors (CCFs) for certain off-balance sheet exposures (BCBS 2014
revisions).\3\
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\3\ See BCBS, ``Basel III leverage ratio framework and
disclosure requirements'' (January 2014), available at http://www.bis.org/publ/bcbs270.htm. See also BCBS, ``Revised Basel III
leverage ratio framework and disclosure requirements--consultative
document'' (June 2013), available at http://www.bis.org/publ/bcbs251.htm.
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The agencies believe that revising the supplementary leverage ratio
in a manner consistent with the BCBS 2014 revisions would strengthen
the definition of total leverage exposure and improve the measure of a
banking organization's on- and off-balance sheet exposures. The
agencies believe that the BCBS 2014 revisions would promote consistency
in the calculation of this ratio across jurisdictions and are
responsive to a number of specific concerns expressed by commenters on
the supplementary leverage ratio in the 2013 revised capital rule and
on the enhanced supplementary leverage ratio standards proposal (eSLR
standards proposal).\4\ In addition, the agencies are proposing
additional supplementary leverage ratio disclosure requirements,
consistent with the BCBS 2014 revisions. The agencies believe that the
proposed disclosures would enhance transparency and provide market
participants with important information related to the supplementary
leverage ratio.
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\4\ See 78 FR 51101 (August 20, 2013).
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Elsewhere in today's Federal Register, the agencies have published
a final rule that applies enhanced supplementary leverage ratio
standards to the largest, most interconnected U.S. banking
organizations (eSLR standards final rule).
The agencies seek comment on all aspects of the proposed rule,
including its interactions with the eSLR standards final rule, as the
proposed changes to total leverage exposure and the methodology for
calculating the supplementary leverage ratio also would, if adopted,
affect banking organizations subject to the eSLR standards final rule.
II. Proposed Rule
As discussed in further detail below, the proposed rule would
revise the calculation of the supplementary leverage ratio and the
definition of total leverage exposure. The proposed rule also would
address some of the comments the agencies received regarding the
interaction of the BCBS agreements and the agencies' eSLR standards
proposal. In general, the changes are designed to strengthen the
supplementary leverage ratio by more appropriately capturing the
exposure of a banking organization's on- and off-balance sheet items.
For example, the proposed rule would capture in total leverage exposure
the effective notional principal amount of credit derivatives and other
similar instruments through which a banking organization provides
credit protection (sold credit protection), which has the effect of
increasing total leverage exposure associated with these credit
derivatives, and introduce graduated CCFs in the treatment of off-
balance sheet commitments that would reduce the portion of total
leverage exposure associated with these commitments. The proposed rule
also would modify the total leverage exposure calculation for
derivative contracts and repo-style transactions in a manner that is
intended to ensure that the supplementary leverage ratio appropriately
reflects the economic exposure of these activities.
Consistent with the 2013 revised capital rule, total leverage
exposure would continue to include:
(i) The balance sheet carrying value of a banking organization's
on-balance sheet assets, less amounts deducted from tier 1 capital
under sections 22(a), 22(c), and 22(d) of the 2013 revised capital
rule;
(ii) The potential future exposure (PFE) for each derivative
contract, including for certain cleared transactions, to which the
banking organization is a counterparty (or each single-product netting
set of such transactions) determined in accordance with the treatment
of derivative contracts under the standardized approach for risk-
weighted assets, and as set forth in section 34 of the 2013 revised
capital rule. However, for purposes of determining total leverage
exposure, a banking organization would not be permitted to reduce the
PFE by the amount of any collateral under section 34(b) of the 2013
revised capital rule; \5\ and
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\5\ A banking organization may choose to adjust the PFE for
certain sold credit protection as described in part II.b of this
preamble.
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(iii) 10 percent of the notional amount of unconditionally
cancellable commitments made by the banking organization.
Under the proposed rule, total leverage exposure also would
include:
Adjustments to exposure amounts associated with derivative
contracts if cash collateral received from, or posted to, a
counterparty for derivative contracts does not meet specified
conditions;
The effective notional principal amount, subject to
certain reductions, of sold credit protection that is not offset by
purchased credit protection on the same underlying reference exposure
that meets specified conditions;
Adjustments to the on-balance sheet asset amounts for
repo-style transactions (including securities lending, securities
borrowing, repurchase and reverse repurchase transactions), including a
requirement to include in total leverage exposure the gross value of
receivables associated with repo-style transactions that do not meet
specified conditions;
A measure of counterparty credit risk for repo-style
transactions; and
The notional amount of all other off-balance sheet
exposures (excluding off-balance sheet exposures associated with
securities lending, securities borrowing, reverse repurchase
transactions, and derivatives) multiplied by the appropriate CCF under
the standardized approach for risk-weighted assets, and as set forth in
section 33 of the 2013 revised capital rule. However, for purposes of
determining total leverage exposure, the minimum CCF that may be
assigned to an off-balance sheet exposure is 10 percent.
The proposed rule also would clarify the calculation of total
leverage
[[Page 24599]]
exposure for a clearing member banking organization with regard to
cleared derivative contracts that are intermediated on behalf of a
clearing member client with a central counterparty (CCP) to ensure that
the clearing member banking organization does not double count these
exposures.
Finally, the proposed rule would revise the calculation of the
supplementary leverage ratio to address some of the comments received
on the eSLR standards proposal. Specifically, under the proposed rule,
a banking organization would calculate tier 1 capital as of the last
day of each reporting quarter, consistent with the calculation of tier
1 capital for purposes of the generally applicable leverage ratio
requirement,\6\ and total leverage exposure would be calculated as the
arithmetic mean of the total leverage exposure calculated as of each
day of the reporting quarter.
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\6\ The generally applicable leverage ratio under the 2013
revised capital rule is the ratio of a banking organization's tier 1
capital to its average total consolidated assets as reported on the
banking organization's regulatory report minus amounts deducted from
tier 1 capital.
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a. Cash Variation Margin
Under the 2013 revised capital rule, total leverage exposure
includes a banking organization's on-balance sheet assets, including
the carrying value, if any, of derivative contracts on the banking
organization's balance sheet. For purposes of determining the carrying
value of derivative contracts, U.S. generally accepted accounting
principles (GAAP) provide a banking organization the option to reduce
any positive mark-to-fair value of a derivative contract by the amount
of any cash collateral received from the counterparty, provided the
relevant GAAP criteria for offsetting are met (the GAAP offset
option).\7\ Similarly, under the GAAP offset option, a banking
organization has the option to offset the negative mark-to-fair value
of a derivative contract with a counterparty by the amount of any cash
collateral posted to the counterparty. Essentially, the GAAP offset
option allows a banking organization to treat cash collateral that the
banking organization receives or posts as a form of pre-settlement of
an obligation between itself and its counterparty to the derivative
contract. In addition, regardless of whether a banking organization
uses the GAAP offset option to calculate the on-balance sheet amount of
derivatives contracts, the banking organization includes the amount of
cash collateral received from the counterparty in its on-balance sheet
assets, and thus in its total leverage exposure.
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\7\ See Accounting Standards Codification paragraphs 815-10-45-1
through 7.
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The proposed rule would specify the conditions that a banking
organization's cash collateral received from or posted to a
counterparty to a derivative contract (cash variation margin) would be
required to satisfy in order for the cash collateral to not be included
in the organization's total leverage exposure. The proposed conditions
are generally similar to the criteria for the GAAP offset option, and
therefore, to the treatment under the 2013 revised capital rule.
However, if a banking organization reduces the positive mark-to-fair
value of a derivative contract with a counterparty as permitted under
the GAAP offset option, but the cash collateral received does not meet
the specified conditions for cash variation margin, the banking
organization would be required to include the positive mark-to-fair
value of the derivative contract gross of any cash collateral in its
total leverage exposure. Similarly, if a banking organization offsets
the net negative mark-to-fair value of derivative contracts with a
counterparty by the amount of any cash collateral posted to the
counterparty, and does not include that cash collateral posted to the
counterparty in its on-balance sheet assets, as permitted under the
GAAP offset option, but the cash collateral posted does not meet the
specified conditions for cash variation margin, the banking
organization would be required to include such cash collateral in its
total leverage exposure.
The agencies believe that the regular and timely exchange of cash
variation margin is an effective way of protecting both counterparties
from the effects of a counterparty default. The proposed criteria that
must be satisfied for cash variation margin to not be included in total
leverage exposure were developed to ensure that such cash collateral
is, in substance, a form of pre-settlement payment on a derivative
contract. This approach is consistent with the design of the
supplementary leverage ratio, which generally does not permit
collateral to reduce exposures for purposes of calculating total
leverage exposure.
Under the proposed rule, cash variation margin that satisfies the
requirements described below may be used to reduce only the current
credit exposure amount (i.e., the replacement cost) of a derivative
contract, described in section 34(a)(i) of the 2013 revised capital
rule, and may not be used to reduce the PFE. Accordingly, the proposed
rule would prohibit a banking organization from using cash variation
margin to reduce the net-to-gross ratio (NGR) described in section
34(a)(2)(ii)(B) of the 2013 revised capital rule. Specifically, in the
calculation of the NGR, cash variation margin may not reduce the net
current credit exposure or the gross current credit exposure. In
addition, the current credit exposure amount of all derivative
contracts with a counterparty would not be allowed to be negative.
Under the proposed rule, if a banking organization applies the GAAP
offset option to the cash collateral exchanged between the banking
organization and its counterparty to a derivative contract, the banking
organization would be required to reverse the effect of the GAAP offset
option for purposes of determining total leverage exposure, unless the
cash collateral is cash variation margin that satisfies all of the
following conditions:
(1) For derivative contracts that are not cleared through a
qualifying central counterparty (QCCP), the cash collateral received by
the recipient counterparty is not segregated;
(2) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(3) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the current credit exposure
amount to the counterparty of the derivative contract, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(4) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that, for purposes of this paragraph, currency of
settlement means any currency for settlement specified in the
qualifying master netting agreement,\8\ the credit support annex to the
qualifying master netting agreement, or in the governing rules for a
cleared transaction; and
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\8\ Qualifying master netting agreement is defined in section 2
of the 2013 revised capital rule.
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(5) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or the governing
rules for a cleared transaction. The qualifying master netting
agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net
[[Page 24600]]
basis, taking into account any variation margin received or provided
under the contract if a credit event involving either counterparty
occurs.
Question 1: What are the benefits and drawbacks of the proposed
treatment of cash variation margin for purposes of calculating total
leverage exposure?
Question 2: What differences, if any, exist between the proposed
criteria for cash variation margin for purposes of the supplementary
leverage ratio and the treatment of cash collateral under GAAP?
Commenters are encouraged to provide quantitative information regarding
the magnitude of any such differences. In addition, what are
commenters' views on an alternative approach for cash collateral
transferred in derivative transactions that would use only the GAAP
offset option for purposes of taking into account cash collateral in
calculation of total leverage exposure?
Question 3: What are the operational implications of the proposed
criteria for cash variation margin, as well as the proposed definition
of the currency of settlement? What other concerns, if any, do
commenters have with regard to banking organizations' ability to
satisfy the specified criteria for cash variation margin in light of
the requirements for qualifying master netting agreements and cleared
transactions?
b. Credit Derivatives
Under the 2013 revised capital rule, credit derivatives are treated
in the same manner as other derivative contracts for purposes of
determining total leverage exposure. As such, a banking organization
would calculate the exposure amount associated with a credit derivative
using the current exposure methodology as described in section 34 of
the 2013 revised capital rule. This methodology captures the
counterparty credit risk arising from the creditworthiness of the
counterparty, but not the credit risk of the underlying reference
exposure.
A banking organization that provides credit protection in the form
of a credit derivative agrees to assume the credit risk of the
reference exposure, similar to providing a guarantee. As such, a
provider of credit protection on an underlying reference exposure has a
credit exposure to the underlying reference exposure, in addition to
the counterparty credit risk exposure associated with the counterparty.
For this reason, the agencies believe that it is appropriate to revise
the measure of exposure for sold credit protection in a manner that is
more consistent with the treatment of guarantees. Sold credit
protection would include, but not be limited to, credit default swaps
and total return swaps that reference instruments with credit risk
(e.g., a bond). This proposed change is consistent with the 2014 BCBS
revisions.
Accordingly, in addition to the exposure amount calculated for sold
credit protection under the current exposure methodology, the proposed
rule would include in total leverage exposure the effective notional
principal amount (that is, the apparent or stated notional principal
amount multiplied by any multiplier in the derivative contract) of sold
credit protection, subject to certain reductions described below. The
use of the effective notional principal amount is designed to capture
the potential exposure of contracts that are leveraged or otherwise
enhanced by the structure of the transaction. For example, a credit
default swap with a stated notional amount of $50 that pays the
purchaser of protection twice the difference between the par value of
the reference exposure and the value of the reference exposure at
default would have an effective notional principal amount equal to
$100.
Under the proposed rule, a banking organization would be permitted
to reduce the effective notional principal amount of sold credit
protection by any reduction in the mark-to-fair value of the sold
credit protection if the reduction is recognized in common equity tier
1 capital.
A banking organization would be permitted to further reduce the
effective notional principal amount of sold credit protection by the
effective notional principal amount of a credit derivative or similar
instrument through which the banking organization has purchased credit
protection from a third party (purchased credit protection), provided
certain requirements are satisfied as described below.
First, the purchased credit protection would need to have a
remaining maturity that is equal to or greater than the remaining
maturity of the sold credit protection.
Second, to reduce the effective notional principal amount of sold
credit protection that references a single reference exposure, the
reference exposure of the purchased credit protection would need to
refer to the same legal entity and rank pari passu with, or be junior
to,\9\ the reference exposure of the sold credit protection.
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\9\ A credit event on the senior reference exposure must result
in a credit event on the junior reference exposure.
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In addition, a banking organization may reduce the effective
notional principal amount of sold credit protection that references a
single reference exposure by a purchased credit protection that
references multiple exposures if the purchased credit protection is
economically equivalent to buying credit protection separately on each
of the individual reference exposures of the sold credit protection.
For example, this would be the case if a banking organization were to
purchase credit protection on an entire securitization structure or on
an entire index that includes the reference exposure of the sold credit
protection. However, if banking organization purchases credit
protection that references multiple exposures, but the purchased credit
protection does not cover all of the sold credit protection's reference
exposures (that is, the purchased credit protection covers only a
subset of the sold credit protection's reference exposures, as in the
case of an n\th\-to-default credit derivative or a tranche of a
securitization), the proposed rule would not allow the banking
organization to reduce the effective notional principal amount of the
sold credit protection that references a single exposure.
To reduce the effective notional principal amount of sold credit
protection that references multiple exposures, the reference exposures
of the purchased credit protection would need to refer to the same
legal entities and rank pari passu with the reference exposures of the
sold credit protection. In addition, the level of seniority of the
purchased credit protection would need to rank pari passu to the level
of seniority of the sold credit protection. Therefore, offsetting would
be recognized only when all of the reference exposures and the level of
subordination of protection sold and protection purchased are
identical. For example, a banking organization may reduce the effective
notional principal amount of the sold credit protection on an index
(e.g., the CDX), or a tranche of an index, with purchased credit
protection on such index, or a tranche of equal seniority of such
index, respectively.
When a banking organization reduces the effective notional
principal amount of sold credit protection by (i) a reduction in the
mark-to-fair value of the sold credit protection (through common equity
tier 1 capital) and (ii) purchased credit protection as described
above, the banking organization must reduce the effective notional
principal amount of purchased credit protection by the amount of any
increase in the mark-to-fair value of the purchased credit protection
that is recognized in common equity tier 1 capital. Further, if
[[Page 24601]]
a banking organization purchases credit protection through a total
return swap and records the net payments received as net income but
does not record offsetting deterioration in the mark-to-fair value of
the sold credit protection on the reference exposure (either through
reductions in fair value or by additions to reserves) in common equity
tier 1 capital, the banking organization would not be allowed to reduce
the effective notional principal amount of the sold credit protection.
Under the proposed rule, because sold credit protection is included
in total leverage exposure through the effective notional principal
amount, the current credit exposure and the PFE, a banking organization
would be permitted to adjust the PFE for sold credit protection to
avoid double-counting of the notional amounts of these exposures. For
example, if the sold credit protection is governed by a qualifying
master netting agreement, a banking organization may adjust the PFE for
sold credit protection covered by the qualifying master netting
agreement. However, a banking organization would be allowed to adjust
only the amount Agross of the PFE calculation for sold
credit derivatives and would not be allowed to adjust the NGR of the
PFE calculation. Finally, a banking organization that elects to adjust
the PFE for sold credit derivatives would be required to do so
consistently over time.
Question 4: What are commenters' views on incorporating the
effective notional principal amount of sold credit protection in total
leverage exposure and on the proposed criteria for determining the
exposure amount of such sold credit protection, including the
operational burden of the calculation?
Question 5: What specific modifications, if any, should the
agencies consider with respect to the proposed measure of exposure for
sold credit protection?
Question 6: What are commenters' views on the proposed optional
adjustment of the PFE calculation for sold credit protection?
c. Repo-Style Transactions
Under the 2013 revised capital rule, total leverage exposure
includes the on-balance sheet carrying value of repo-style
transactions, but not any related off-balance sheet exposure for such
transactions. For the purpose of determining the on-balance sheet
carrying value of a repo-style transaction with a counterparty, GAAP
permits the offset of gross values of receivables due from a
counterparty under reverse repurchase agreements by the amount of the
payments due to the counterparty (that is, amounts recognized as
payables to the same counterparty under repurchase agreements),
provided the relevant accounting criteria are met (GAAP offset for
repo-style transactions).\10\
---------------------------------------------------------------------------
\10\ See Accounting Standards Codification paragraph 210-20-45-
11.
---------------------------------------------------------------------------
Consistent with the approach in the BCBS 2014 revisions, the
proposed rule would specify the criteria for when a banking
organization would be required to reverse the GAAP offset for repo-
style transactions and include a measure of counterparty credit risk
for repo-style transactions in the calculation of total leverage
exposure to better capture a banking organization's exposure to repo-
style transaction counterparties. The proposed rule would also clarify
the calculation of exposure for repo-style transactions where a banking
organization acts as an agent.
Under the proposed rule, if a banking organization sells securities
under a repo-style transaction and the transaction is treated as a sale
(rather than a secured borrowing) for accounting purposes, the banking
organization would be required to add the value of such securities to
total leverage exposure for as long as the repo-style arrangement is
outstanding. While the agencies believe that such repo-style
arrangements are not common in the United States, the agencies are
proposing this treatment, consistent with the BCBS 2014 revisions, to
capture a banking organization's economic exposure, even if an
accounting sales treatment is achieved, in cases when the banking
organization may have future contractual obligations arising under the
repo-style arrangement.
Question 7: What are commenters' views on the proposed treatment of
repo-style arrangements where an accounting sales treatment is
achieved?
Under the proposed rule, when a banking organization acts as a
principal in a repo-style transaction, it generally would include in
total leverage exposure the amount of any on-balance sheet assets
recognized for repo-style transactions (that is, after applying the
GAAP offset for repo-style transactions). However, if the criteria
described below are not satisfied, the banking organization would be
required to replace the on-balance sheet assets for those repo-style
transactions with the gross value of receivables associated with those
repo-style transactions in calculating its total leverage exposure.
That is, if a banking organization enters into repurchase and reverse
repurchase transactions with the same counterparty and applies the GAAP
offset for repo-style transactions but does not meet the below
criteria, the banking organization would be required to replace the on-
balance sheet assets of the reverse repurchase transactions with the
gross value of receivables for those reverse repurchase transactions.
Specifically, under the proposed rule, the gross value of
receivables associated with the repo-style transactions would be
included in total leverage exposure unless all of the following
criteria are met:
(A) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(B) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(C) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement. That is, the cash
flows of the transactions are equivalent, in effect, to a single net
amount on the settlement date. To achieve this result, both
transactions must be settled through the same settlement system and the
settlement arrangements must be supported by cash or intraday credit
facilities intended to ensure that settlement of both transactions will
occur by the end of the business day, and the settlement of the
underlying securities does not interfere with the net cash settlement.
The proposed criteria have been developed by the BCBS to ensure
that banking organizations subject to different accounting frameworks
and using different settlement mechanisms measure the exposure of repo-
style transactions in a consistent manner. For example, the third
proposed criterion is designed to ensure that the cash flows between
the counterparties to repo-style transactions are equivalent, in
effect, to a single net amount on the settlement date. This criterion
would be met if the counterparties use securities transfer systems or
central settlement systems, supported by cash or intraday credit
facilities, that offset repo-style transactions using gross amounts for
each counterparty, but require the counterparties to transfer only a
net amount owed at the end of the business day.
The agencies observe that, as compared to a potentially more
encompassing measure of exposure that
[[Page 24602]]
would include the gross values of receivables in reverse repurchase
transactions, the proposed approach of allowing a limited offsetting of
such assets gives some recognition to the arrangements that banking
organizations have to limit their effective economic exposure from
these transactions. Based on supervisory experience with current
industry practices, the agencies believe that the proposed criteria for
repo-style transactions would result in repo-style transaction amounts
in total leverage exposure that are somewhat greater than the on-
balance sheet amounts and, as a result, would increase the regulatory
capital requirement for such transactions. The agencies also
acknowledge that there may be some costs to banking organizations
associated with developing information systems to ensure that banking
organizations meet the proposed criteria for repo-style transactions.
Question 8: What are the operational implications of the proposed
netting criteria for repo-style transactions compared to GAAP, and the
magnitude of the change in total leverage exposure for these
transactions compared to GAAP?
Question 9: What are the potential costs of developing the
necessary systems to offset amounts recognized as receivables due from
a counterparty under reverse repurchase agreements?
In a security-for-security repo-style transaction, rather than
receiving cash as collateral against securities loaned, a banking
organization receives securities as collateral for the securities that
it lends. Under GAAP, the receiver of the securities lent (a securities
borrower) does not include a security borrowed on its balance sheet
unless the securities borrower sells the security or its lender
defaults under the terms of the transaction.\11\ The security that a
securities borrower transfers to its lender (a securities lender) as
collateral would remain on the securities borrower's balance sheet.
Consistent with GAAP, under the proposed rule, a securities borrower
would include the security transferred to a securities lender in total
leverage exposure and would not include the security borrowed in total
leverage exposure, unless it sells the security or the lender defaults.
---------------------------------------------------------------------------
\11\ The accounting treatment of security-for-security
transactions is in Accounting Standards Codification 860-30, Secured
Borrowing and Collateral.
---------------------------------------------------------------------------
From the securities lender's perspective, under GAAP, a security
received as collateral from a securities borrower is included on the
security lender's balance sheet as an asset. The securities lender also
would continue to include the security that it lent on its balance
sheet, if it is treated as a secured borrowing. Under the proposed
rule, in a security-for-security repo-style transaction, a securities
lender would be allowed to exclude the security received as collateral
from total leverage exposure, unless and until the securities lender
sells or re-hypothecates the security. If the securities lender sells
or re-hypothecates the security, the securities lender would include
the amount of cash received or, in the case of re-hypothecation, the
value of the security pledged as collateral in total leverage exposure.
This approach is designed to ensure that a securities lender does not
include both a security lent and a security received in total leverage
exposure, until the securities lender sells or re-hypothecates the
security received, to achieve a consistent treatment of security-for-
security repo-style transactions under different accounting frameworks.
Question 10: What are commenters' views regarding the operational
burden of the proposed exclusion of securities received in a security-
for-security transaction from total leverage exposure?
Question 11: How quantitatively different is the proposed treatment
of repo-style transactions in total leverage exposure compared to the
treatment under GAAP?
The proposed rule also would include a counterparty credit risk
measure in total leverage exposure to capture a banking organization's
exposure to the counterparty in repo-style transactions. To determine
the counterparty exposure for a repo-style transaction, including a
transaction in which a banking organization acts as an agent for a
customer and indemnifies the customer against loss, the banking
organization would subtract the fair value of the instruments, gold,
and cash received from a counterparty from the fair value of any
instruments, gold and cash lent to the counterparty. If the resulting
amount is greater than zero, it would be included in total leverage
exposure. For repo-style transactions that are not subject to a
qualifying master netting agreement or that are not cleared
transactions, the counterparty exposure measure must be calculated on a
transaction-by-transaction basis. However, if a qualifying master
netting agreement is in place, or the transaction is a cleared
transaction, the banking organization could net the total fair value of
instruments, gold, and cash lent to a counterparty against the total
fair value of instruments, gold and cash received from the counterparty
for those transactions.
The agencies believe that the proposed approach recognizes that any
positive, uncollateralized portion of a repo-style transaction (or a
netting set thereof) is, in effect, an economic exposure for a banking
organization that warrants inclusion in total leverage exposure.
Question 12: What are commenters' views on the proposed treatment
of counterparty credit risk for repo-style transactions?
Finally, consistent with the BCBS 2014 revisions, where a banking
organization acts as agent for a repo-style transaction and provides a
guarantee (indemnity) to a customer with regard to the performance of
the customer's counterparty that is greater than the difference between
the fair value of the security or cash lent and the fair value of the
security or cash borrowed, the banking organization must include the
amount of the guarantee that is greater than this difference in its
total leverage exposure. The agencies believe that this treatment
recognizes that such indemnifications are effectively full or partial
guarantees of the security or cash that is lent or borrowed.
Question 13: What clarifications may be warranted in any final rule
with regard to the proposed treatment for agency repo-style
transactions?
d. Credit Conversion Factors for Off-Balance Sheet Exposures
Under the 2013 revised capital rule, banking organizations must
apply a 100 percent CCF to all off-balance sheet items to calculate
total leverage exposure, except for unconditionally cancellable
commitments, which are subject to a 10 percent CCF. The proposed rule
would revise this treatment, consistent with the BCBS 2014 revisions.
The proposed rule would retain the 10 percent CCF for unconditionally
cancellable commitments, but it would replace the uniform 100 percent
CCF for other off-balance sheet items with the CCFs applicable under
the standardized approach for risk-weighted assets in section 33 of the
2013 revised capital rule.
For example, under the proposed rule, a banking organization would
apply a 20 percent CCF to a commitment with an original maturity of one
year or less that is not unconditionally cancellable, as provided by
section 33 of the 2013 revised capital rule. However, for a commitment
that is unconditionally cancellable, a banking organization would apply
a 10 percent CCF even
[[Page 24603]]
though such commitment receives a zero percent CCF under the 2013
revised capital rule.
The agencies weighed a number of supervisory and prudential
considerations in proposing this approach. The fixed 100 percent CCF in
the 2013 revised capital rule is a conservative measure of economic
exposure that does not differentiate across types of off-balance sheet
commitments. However, because a uniform 100 percent CCF treats all off-
balance sheet exposures identically to on-balance sheet exposures, such
an approach likely overstates the relative magnitude of the effective
economic exposure created by most off-balance sheet exposures as
compared to on-balance sheet exposures. The proposed approach is
designed to incorporate off-balance sheet exposures in total leverage
exposure without overstating the effective exposure amounts for these
items.
In addition, to ensure that all unfunded commitments are included
in a banking organization's total leverage exposure, unconditionally
cancellable commitments (such as credit card lines) would continue to
be subject to a CCF of 10 percent, consistent with the 2013 revised
capital rule, rather than the zero percent specified in the
standardized approach for risk-weighted assets. The agencies believe
that the proposed CCFs, which are also consistent with the
internationally agreed approach of standardized CCFs, are appropriate
for measuring total leverage exposure.
Question 14: What are commenters' views on the proposed CCFs for
off-balance sheet items? What, if any, modifications should be made to
the proposed CCFs for any specific off-balance sheet items?
e. Central Clearing of Derivative Transactions
The 2013 revised capital rule incorporates over-the-counter (OTC)
derivatives and cleared derivative transactions in total leverage
exposure in a uniform manner. The agencies are clarifying that the
calculation of total leverage exposure must include the PFE for both
non-cleared and certain cleared derivative transactions.
The 2013 revised capital rule provides that a banking organization
must include in total leverage exposure the PFE for each derivative
contract to which the banking organization is a counterparty (or each
single-product netting set of such transactions) calculated in
accordance with section 34 (OTC derivative contracts), but without
regard to any collateral used to reduce risk-based capital requirements
pursuant to section 34(b) of the 2013 revised capital rule. Although
cleared transactions are generally addressed in section 35 of the 2013
revised capital rule, section 35 refers to section 34 for the purpose
of determining the PFE of cleared derivative transactions. Thus, for
the purpose of measuring total leverage exposure, the PFE for each
derivative transaction to which a banking organization is a
counterparty, including cleared derivative transactions, should be
determined pursuant to section 34. The agencies are proposing to revise
the description of total leverage exposure to make this point more
clear.
In addition, the agencies are clarifying the treatment of a cleared
transaction on behalf of a clearing member client (client-cleared
transaction). There are two models for client-cleared transactions--the
agency model, which is common in the United States, and the principal
model. In the agency model, a clearing member client enters into a
derivative transaction directly with the CCP and the clearing member
banking organization provides a guarantee of its clearing member
client's performance to the CCP. If the clearing member client
defaults, the clearing member banking organization must assume its
clearing member client's obligations to the CCP with respect to the
transaction (the guaranteed amount). The agencies are clarifying that
the clearing member banking organization must include the guaranteed
amount in its total leverage exposure.
In the principal model, the clearing member banking organization
serves as an intermediary between the clearing member client and the
CCP. The principal model client-cleared transaction generally has two
separate components--the clearing member client leg between the
clearing member client and the clearing member banking organization,
and the CCP leg between the clearing member banking organization and
the CCP. The net effect is that, in the absence of a default, the
clearing member banking organization is an intermediary for the
exchange of cash flows between the clearing member client and the CCP,
who are the effective counterparties to the transaction. If the
clearing member client defaults in the principal model, the clearing
member banking organization must generally continue to honor the
clearing member client's contract with the CCP (that is, the guaranteed
amount). The agencies are clarifying that the clearing member banking
organization must include the guaranteed amount in its total leverage
exposure.
In addition, in either model for client-cleared transactions, a
banking organization may or may not guarantee the performance of the
CCP to a clearing member client. When the clearing member banking
organization does not guarantee the performance of the CCP, the
clearing member banking organization has no payment obligation to the
clearing member client in the event of a CCP default. In these
circumstances, requiring the clearing member banking organization to
include an exposure to the CCP in its total leverage exposure generally
would result in an overstatement of total leverage exposure. Therefore,
under the proposed rule, and consistent with the BCBS 2014 revisions, a
clearing member banking organization would not be required to include
in its total leverage exposure an exposure to the CCP for client-
cleared transactions if the clearing member banking organization does
not guarantee the performance of the CCP to the clearing member client.
However, if a clearing member banking organization does guarantee the
performance of the CCP to the clearing member client, then a clearing
member banking organization would be required to include an exposure to
the CCP for the client-cleared transactions in its total leverage
exposure under the proposed rule.
Question 15: What are commenters' views on the proposed total
leverage exposure measurement of client-cleared transactions entered
into by a clearing member banking organization? What other additional
clarifications, if any, are necessary to clarify the exposure amount
for client-cleared transactions?
f. Daily Averaging
The 2013 revised capital rule defines the supplementary leverage
ratio as the arithmetic mean of the ratio of tier 1 capital to total
leverage exposure calculated as of the last day of each month in the
reporting quarter. The agencies are proposing to revise the calculation
of the supplementary leverage ratio as described below.
Under the proposed rule, the numerator of the supplementary
leverage ratio, tier 1 capital, would be calculated as of the last day
of each reporting quarter. This approach is consistent with the
calculation of the numerator of the generally applicable leverage ratio
and would ensure that banking organizations use the same tier 1
calculation for all of their leverage ratio calculations as well as
their tier 1 capital ratio. However, total leverage exposure would be
defined as the arithmetic mean of the total leverage exposure
calculated for each day of the
[[Page 24604]]
reporting quarter. In other words, banking organizations would use the
average of the daily calculations throughout the quarter of their total
leverage exposure without applying any deductions. After calculating
quarter-end tier 1 capital, banking organizations would subtract from
the measure of total leverage exposure the applicable deductions from
the previous quarter, for purposes of calculating the quarter-end
supplementary leverage ratio.
Some commenters on the eSLR standards proposal stated that using an
average of three month-end balances to calculate total leverage
exposure could lead to an artificial and temporary increase of the
supplementary leverage ratio at the end of the month. These commenters
argued that certain banking organizations, such as custody banks, can
experience sudden substantial deposit inflows at the end of reporting
periods or during times of financial stress, potentially causing a
temporary increase of balance sheet assets. The proposed rule is
designed to address this concern regarding sudden deposit inflows and
result in measuring total leverage exposure more consistently over
time.
Question 16: What are commenters' views on the operational burden
associated with the daily averaging of off-balance sheet exposures,
including the PFE of derivatives, and do the benefits of such a
calculation outweigh the costs?
Question 17: What are commenters' views on the operational burden
and integrity of an approach where daily averaging is required for on-
balance sheet assets only? Under such an approach, banking
organizations would use the daily average of on-balance sheet exposures
and the quarter-end calculation of off-balance sheet exposures when
computing total leverage exposure.
Question 18: Are there any alternative methods of calculating total
leverage exposure that would be appropriate for the supplementary
leverage ratio?
III. Estimated Capital Impact
Quantitatively, compared to the 2013 revised capital rule, the most
important changes in total leverage exposure in the proposed rule are
(i) the proposed use of standardized CCFs for certain off-balance sheet
activities, which should lead to a reduction in total leverage exposure
and (ii) the proposed treatment of sold credit derivatives, which
should lead to an increase in total leverage exposure. The actual total
leverage exposure under the proposed rule would be especially sensitive
to the volume of sold credit derivatives activities and whether those
activities are hedged in a manner recognized under the proposal. Other
regulatory changes, including the implementation of sections 619 and
716 of the Dodd-Frank Wall Street Reform and Consumer Protection
Act,\12\ also may reduce the volume of credit derivatives generally, in
addition to increasing the extent to which credit derivatives are
hedged.
---------------------------------------------------------------------------
\12\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 136. Section 619 prohibits
banking entities from engaging in proprietary trading and having
ownership interests in or sponsoring hedge funds or private equity
funds. 12 U.S.C. 1851. Section 716 restricts the ability of insured
depository institutions to engage in swaps. 12 U.S.C. 8305.
---------------------------------------------------------------------------
Supervisory estimates suggest that the proposed changes to the
definition of total leverage exposure would result in an approximately
5.5 percent aggregate increase in total leverage exposure compared to
the definition of total leverage exposure in the 2013 revised capital
rule for all banking organizations subject to the revised
definition.\13\ This is an average figure and could vary materially
from institution to institution. Additionally, these estimates are
especially sensitive to the volume of credit derivatives activities and
whether those activities are hedged. For some banking organizations,
the proposed total leverage exposure may increase by less than the
amount estimated above, and in some cases may result in a decrease in
total leverage exposure.
---------------------------------------------------------------------------
\13\ The estimates were generated by using December 2013 CCAR
data, December Y-9C data, and June 2013 Quantitative Impact Study
data.
---------------------------------------------------------------------------
For the eight bank holding companies subject to the eSLR standards,
supervisory estimates suggest that the proposed changes to the
definition of total leverage exposure would result in an approximately
8.5 percent aggregate increase in total leverage exposure compared to
the definition of total leverage exposure in the 2013 revised capital
rule. In order to avoid being subject to limitations on capital
distributions and discretionary bonus payments, these institutions
would need to raise in the aggregate over $46 billion in tier 1 capital
to exceed a 5 percent supplementary leverage ratio under the proposed
definition of total leverage exposure, over and above the amount they
would need to raise if the definition of total leverage exposure in the
2013 revised capital rule remained unchanged.
The agencies are seeking comment on the regulatory capital impact
of the proposed changes to total leverage exposure on advanced
approaches banking organizations subject to the supplementary leverage
ratio standard and banking organizations subject to the eSLR standards.
Question 19: How does the commenters' estimate of the potential
regulatory capital impact under the proposed rule, compared to the
regulatory capital impact under the eSLR standards final rule and the
2013 revised capital rule, differ from the agencies' impact estimate of
the proposed rule?
Question 20: Do the proposed changes to the definition of total
leverage exposure warrant any changes to the calibration of the minimum
ratios, or the well-capitalized or buffer levels of the supplementary
leverage ratio?
IV. Disclosures
The agencies have long supported meaningful public disclosure by
banking organizations about their regulatory capital with a goal of
improving market discipline and disclosing information in a comparable
and consistent manner. The agencies' regulatory reports already
incorporate reporting of the supplementary leverage ratio under the
2013 rule, effective January 1, 2015. Consistent with the BCBS 2014
revisions, the agencies are proposing to apply additional disclosure
requirements for the calculation of the supplementary leverage ratio to
top-tier advanced approaches banking organizations. The agencies
believe that the proposed disclosures would enhance the transparency
and consistency of reporting requirements for the supplementary
leverage ratio by all internationally active banking organizations.
Specifically, under the proposed rule, banking organizations would
complete two parts of a supplementary leverage ratio disclosure table.
Part 1 is designed to summarize the differences between the total
consolidated accounting assets reported on a banking organization's
published financial statements and regulatory reports and the
calculation of total leverage exposure. Part 2 is designed to collect
information on the components of total leverage exposure in more
detail, similar to the version of FFIEC 101, Schedule A taking effect
in March 2014. The agencies plan to reconsider the regulatory reporting
requirements of the supplementary leverage ratio on FFIEC 101, Schedule
A, in the future, to reflect these disclosures.
[[Page 24605]]
Table 13 to Section 173 of the 2013 Revised Capital Rule--Supplementary
Leverage Ratio
------------------------------------------------------------------------
Dollar amounts in thousands
-------------------------------------------
Tril Bil Mil Thou
------------------------------------------------------------------------
Part 2: Summary comparison
of accounting assets and
total leverage exposure
------------------------------------------------------------------------
1 Total consolidated assets
as reported in published
financial statements.......
2 Adjustment for investments
in banking, financial,
insurance or commercial
entities that are
consolidated for accounting
purposes but outside the
scope of regulatory
consolidation..............
3 Adjustment for fiduciary
assets recognized on
balance sheet but excluded
from total leverage
exposure...................
4 Adjustment for derivative
exposures..................
5 Adjustment for repo-style
transactions...............
6 Adjustment for off-balance
sheet exposures (that is,
conversion to credit
equivalent amounts of off-
balance sheet exposures)...
7 Other adjustments.........
8 Total leverage exposure...
------------------------------------------------------------------------
Part 2: Supplementary
leverage ratio
------------------------------------------------------------------------
On-balance sheet exposures
------------------------------------------------------------------------
1 On-balance sheet assets
(excluding on-balance sheet
assets for repo-style
transactions and derivative
exposures, but including
cash collateral received in
derivative transactions)...
2 LESS: Amounts deducted
from tier 1 capital........
3 Total on-balance sheet
exposures (excluding on-
balance sheet assets for
repo-style transactions and
derivative exposures, but
including cash collateral
received in derivative
transactions) (sum of lines
1 and 2)...................
------------------------------------------------------------------------
Derivative exposures
------------------------------------------------------------------------
4 Replacement cost for
derivative exposures (that
is, net of cash variation
margin)....................
5 Add-on amounts for
potential future exposure
(PFE) for derivatives
exposures..................
6 Gross-up for cash
collateral posted if
deducted from the on-
balance sheet assets,
except for cash variation
margin.....................
7 LESS: Deductions of
receivable assets for cash
variation margin posted in
derivatives transactions,
if included in on-balance
sheet assets...............
8 LESS: Exempted CCP leg of
client-cleared transactions
9 Effective notional
principal amount of sold
credit protection..........
10 LESS: Effective notional
principal amount offsets
and PFE adjustments for
sold credit protection.....
11 Total derivative
exposures (sum of lines 4
to 10).....................
------------------------------------------------------------------------
Repo-style transactions
------------------------------------------------------------------------
12 On-balance sheet assets
for repo-style
transactions, except
include the gross value of
receivables for reverse
repurchase transactions.
Exclude from this item the
value of securities
received in a security-for-
security repo-style
transaction where the
securities lender has not
sold or re-hypothecated the
securities received.
Include in this item the
value of securities sold
under a repo-style
arrangement................
13 LESS: Reduction of the
gross value of receivables
in reverse repurchase
transactions by cash
payables in repurchase
transactions under netting
agreements.................
14 Counterparty credit risk
for all repo-style
transactions...............
15 Exposure for repo-style
transactions where a
banking organization acts
as an agent................
16 Total exposures for repo-
style transactions (sum of
lines 12 to 15)............
------------------------------------------------------------------------
Other off-balance sheet
exposures
------------------------------------------------------------------------
17 Off-balance sheet
exposures at gross notional
amounts....................
18 LESS: Adjustments for
conversion to credit
equivalent amounts.........
19 Off-balance sheet
exposures (sum of lines 17
and 18)....................
------------------------------------------------------------------------
Capital and total leverage
exposure
------------------------------------------------------------------------
20 Tier 1 capital...........
21 Total leverage exposure
(sum of lines 3, 11, 16 and
19)........................
------------------------------------------------------------------------
Supplementary leverage ratio
------------------------------------------------------------------------
22 Supplementary leverage
ratio...................... (in percent)
------------------------------------------------------------------------
[[Page 24606]]
Consistent with the BCBS 2014 revisions, if a banking organization
has material differences between its total consolidated assets as
reported in published financial statements and regulatory reports and
its reported on-balance sheet assets for purposes of calculating the
supplementary leverage ratio, the banking organization would be
required to disclose and explain the source of the material
differences. In addition, if a banking organization's supplementary
leverage ratio changes significantly from one reporting period to
another, the banking organization would be required to explain the key
drivers of the material changes. Banking organizations would be
required to disclose this information quarterly, using the exact
template proposed in Table 13, and make the disclosures publicly
available.
Question 21: Would any of the disclosure items in the table not be
relevant for U.S. banking organizations?
Question 22: What is the operational burden of the proposed
disclosure requirements?
Question 23: What, if any, modifications to the disclosure
requirements should the agencies consider in order to reduce
operational burden, clarify disclosure items, or align with other
disclosure and reporting requirements?
V. Regulatory Analyses
A. Paperwork Reduction Act (PRA)
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The OCC and FDIC will obtain OMB
control numbers. The OMB control number for the Board is 7100-0313 and
will be extended, with revision. The information collection
requirements contained in this joint notice of proposed rulemaking have
been submitted to OMB for review and approval by the OCC and FDIC under
section 3507(d) of the PRA and section 1320.11 of OMB's implementing
regulations (5 CFR part 1320). The Board reviewed the proposed rule
under the authority delegated to the Board by OMB.
The proposed rule contains requirements subject to the PRA. The
disclosure requirements are found in section ----.173. The disclosure
requirements in section ----.172 are accounted for in section ----.173.
This information collection requirement would be consistent with the
BCBS 2014 revisions to the Basel III leverage ratio, as mentioned in
the Abstract below. The respondents are for-profit financial
institutions, not including small businesses (see the agencies'
Regulatory Flexibility Analysis).
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this proposed rule that may affect reporting, recordkeeping,
or disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section. A copy of the comments may
also be submitted to the OMB desk officer for the agencies: By mail to
U.S. Office of Management and Budget, 725 17th Street NW.,
10235, Washington, DC 20503; by facsimile to 202-395-6974; or
by email to: [email protected], Attention, Federal Banking
Agency Desk Officer.
Proposed Information Collection
Title of Information Collection: Disclosure Requirements Associated
with Supplementary Leverage Ratio.
Frequency of Response: Quarterly.
Affected Public: Businesses or other for-profit.
Respondents
OCC: National banks and federal savings associations that are
subject to the OCC's advanced approaches risk-based capital rules.
Board: State member banks, bank holding companies, and savings and
loan holding companies that are subject to the Board' advanced
approaches risk-based capital rules.
FDIC: Insured state nonmember banks and state savings associations
that are subject to the FDIC's advanced approaches risk-based capital
rules.
Abstract: All banking organizations that are subject to the
agencies' advanced approaches risk-based capital rules (advanced
approaches banking organizations), as defined in the 2013 revised
capital rule, are required to disclose their supplementary leverage
ratios beginning January 1, 2015. Advanced approaches banking
organizations must report their supplementary leverage ratios on the
applicable regulatory reports. Under the proposed rule, advanced
approaches banking organizations would disclose two parts of a
supplementary leverage ratio table beginning January 1, 2015. The
proposed disclosure requirements are consistent with the proposed
calculation of the supplementary leverage ratio in the proposed rule
and with the 2014 BCBS revisions to the Basel III leverage ratio. The
agencies believe that the proposed disclosures would enhance the
transparency and consistency of reporting requirements for the
supplementary leverage ratio by all internationally active
organizations.
Disclosure Requirements
Section ----.173 states that advanced approaches banking
organizations that have successfully completed parallel run must make
the disclosures described in Tables 1 through 12. Under the proposed
rule, advanced approaches banking organizations would be required to
make the disclosures described in the proposed Table 13 beginning
January 1, 2015, regardless of the parallel run status. The agencies do
not anticipate an additional initial setup burden for complying with
the proposed disclosure requirements because advanced approaches
banking organizations are already subject to reporting the
supplementary leverage ratio on the applicable regulatory reports.
Estimated Burden per Response
Disclosure Burden
Section ----.173--5 hours.
OCC
Number of respondents: 14.
Total estimated annual burden: 280 hours.
Board
Number of respondents: 20.
Current estimated annual burden: 413,986 hours.
Proposed revisions only estimated annual burden: 400 hours.
Total estimated annual burden: 414,386 hours.
[[Page 24607]]
FDIC
Number of respondents: 8.
Total estimated annual burden: 160 hours.
B. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency, in connection with a notice of proposed rulemaking,
to prepare an Initial Regulatory Flexibility Act analysis describing
the impact of the rule on small entities (defined by the Small Business
Administration for purposes of the RFA to include banking entities with
total assets of $500 million or less) or to certify that the rule will
not have a significant economic impact on a substantial number of small
entities.
Using the SBA's size standards, as of December 31, 2013, the OCC
supervised 1,195 small entities.\14\
---------------------------------------------------------------------------
\14\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $500 million and $35.5 million,
respectively. 78 FR 37409 (June 20, 2013). Consistent with the
General Principles of Affiliation, 13 CFR 121.103(a), the OCC
counted the assets of affiliated financial institutions when
determining whether to classify a national bank or Federal savings
association as a small entity. The OCC used December 31, 2013, to
determine size because a ``financial institution's assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See footnote 8 of the
U.S. Small Business Administration's Table of Size Standards.
---------------------------------------------------------------------------
As described in the SUPPLEMENTARY INFORMATION section of the
preamble, the proposed rule would apply only to advanced approaches
banking organizations. Advanced approaches banking organization is
defined to include a national bank or Federal savings associations that
has, or is a subsidiary of a bank holding company or savings and loan
holding company that has, total consolidated assets of $250 billion or
more, total consolidated on-balance sheet foreign exposure of $10
billion or more, or that has elected to use the advanced approaches
framework. After considering the SBA's size standards and General
Principals of Affiliation to identify small entities, the OCC
determined that no small national banks or Federal savings associations
are advanced approaches banking organizations. Because the proposed
rule applies only to advanced approaches banking organizations, it does
not impact any OCC-supervised small entities. Therefore, the OCC
certifies that the proposed rule will not have a significant economic
impact on a substantial number of OCC-supervised small entities.
Board: The Board is providing an initial regulatory flexibility
analysis with respect to this proposed rule. As discussed above, this
proposed rule would amend the calculation of total leverage exposure in
sections 2 and 10 of the 2013 revised capital rule, and amend sections
172 and 173 of the rule by adding additional disclosure requirements.
These amendments would implement changes in line with the BCBS 2014
revisions.
Under regulations issued by the Small Business Administration, a
small entity includes a depository institution, bank holding company,
or savings and loan holding company with total assets of $500 million
or less (a small banking organization).\15\ As of December 31, 2013,
there were approximately 627 small state member banks. As of December
31, 2013, there were approximately 3,676 small bank holding companies
and approximately 268 small savings and loan holding companies.\16\
---------------------------------------------------------------------------
\15\ See 13 CFR 121.201. Effective July 22, 2013, the Small
Business Administration revised the size standards for banking
organizations to $500 million in assets from $175 million in assets.
78 FR 37409 (June 20, 2013).
\16\ Under the prior Small Business Administration threshold of
$175 million in assets, as of March 31, 2013 the Board supervised
approximately 369 small state member banks. As of December 31, 2013,
there were approximately 2,259 small bank holding companies.
---------------------------------------------------------------------------
The proposed rule would apply only to advanced approaches banking
organizations, which, generally, are banking organizations with total
consolidated assets of $250 billion or more, that have total
consolidated on-balance sheet foreign exposure of $10 billion or more,
are a subsidiary of an advanced approaches depository institution, or
that elect to use the advanced approaches framework. Currently, no
small top-tier bank holding company, top-tier savings and loan holding
company, or state member bank is an advanced approaches banking
organization, so there would be no additional projected compliance
requirements imposed on small bank holding companies, savings and loan
holding companies, or state member banks. The Board expects that any
small bank holding companies, savings and loan holding companies, or
state member banks that would be covered by this proposed rule would
rely on its parent banking organization for compliance and would not
bear additional costs.
The Board is aware of no other Federal rules that duplicate,
overlap, or conflict with the proposed rule. The Board believes that
the proposed rule will not have a significant economic impact on small
banking organizations supervised by the Board and therefore believes
that there are no significant alternatives to the proposed rule that
would reduce the economic impact on small banking organizations
supervised by the Board.
The Board welcomes comment on all aspects of its analysis. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
FDIC: The RFA requires an agency to provide an IRFA with a proposed
rule or to certify that the rule will not have a significant economic
impact on a substantial number of small entities (defined for purposes
of the RFA to include banking entities with total assets of $500
million or less).\17\
---------------------------------------------------------------------------
\17\ Effective July 22, 2013, the SBA revised the size standards
for banking organizations to $500 million in assets from $175
million in assets. 78 FR 37409 (June 20, 2013).
---------------------------------------------------------------------------
As described above in this preamble, the proposed rule would amend
the definition of total leverage exposure in section 2 of the 2013
revised capital rule, the methodology for determining total leverage
exposure under section 10 of the 2013 revised capital rule, and add an
additional disclosure requirement in sections 172 and 173 of the 2013
revised capital rule. All of these changes would apply only to advanced
approaches banking organizations. Generally, the advanced approaches
framework applies to banking organizations that have consolidated total
assets equal to $250 billion or more; have consolidated total on-
balance sheet foreign exposure equal to $10 billion or more; are a
subsidiary of a depository institution that uses the advanced
approaches framework; or elects to use the advanced approaches
framework.
As of December 31, 2013, based on a $500 million threshold, 1 (out
of 3,394) small state nonmember banks and no (out of 303) small state
savings associations were under the advanced approaches framework.
Therefore, the FDIC does not believe that the proposed rule will result
in a significant economic impact on a substantial number of small
entities under its supervisory jurisdiction.
The FDIC certifies that the proposed rule would not have a
significant economic impact on a substantial number of small FDIC-
supervised institutions.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Reform Act) provides that an agency that is
subject to the Unfunded Mandates Act
[[Page 24608]]
must prepare a budgetary impact statement before promulgating a rule
that includes a Federal mandate that may result in expenditure by
State, local, and tribal governments, in the aggregate, or by the
private sector, of $100 million (adjusted for inflation) or more in any
one year. The current inflation-adjusted expenditure threshold is $141
million. If a budgetary impact statement is required, section 205 of
the UMRA also requires an agency to identify and consider a reasonable
number of regulatory alternatives before promulgating a rule. The OCC
has determined this proposed rule is likely to result in the
expenditure by the private sector of $141 million or more. The OCC has
prepared a budgetary impact analysis and identified and considered
alternative approaches. When the proposed rule is published in the
Federal Register, the full text of the OCC's analyses will available
at: http://www.regulations.gov, Docket ID: OCC-2014-0008.
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the proposed rule in a simple and straightforward manner, and invite
comment on the use of plain language. For example:
Have the agencies organized the material to suit your
needs? If not, how could they present the proposed rule more clearly?
Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
Do the regulations contain technical language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would achieve that?
Is this section format adequate? If not, which of the
sections should be changed and how?
What other changes can the agencies incorporate to make
the regulation easier to understand?
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 217
Administrative practice and procedure, Banks, Banking, Capital,
Federal Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 324
Administrative practice and procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the preamble and under the authority
of 12 U.S.C. 93a, 1462, 1462a, 1463, 1464, 3907, 3909, 1831o, and
5412(b)(2)(B), the Office of the Comptroller of the Currency proposes
to amend part 3 of chapter I of title 12, Code of Federal Regulations
as follows:
PART 3--CAPITAL ADEQUACY STANDARDS
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
0
2. In Sec. 3.2, revise the definition of ``total leverage exposure''
to read as follows:
Sec. 3.2 Definitions.
* * * * *
Total leverage exposure is defined in Sec. 3.10(c)(4)(ii).
* * * * *
0
3. Revise Sec. 3.10(c)(4) to read as follows:
Sec. 3.10. Minimum capital requirements.
* * * * *
(c) * * *
(4) Supplementary leverage ratio. (i) An advanced approaches
national bank's or Federal savings association's supplementary leverage
ratio is the ratio of its tier 1 capital calculated as of the last day
of each reporting quarter to total leverage exposure calculated as the
simple arithmetic mean of the total leverage exposure calculated as of
each day of the reporting quarter, using the applicable deductions
under Sec. 3.22(a), (c), and (d) as of the last day of the previous
reporting quarter.
(ii) For purposes of this part, total leverage exposure means the
sum of the items described as follows in paragraphs (c)(4)(ii)(A)
through (c)(4)(ii)(H) of this section, as adjusted by any applicable
requirement for clearing member national banks and Federal savings
associations described in paragraph (c)(4)(ii)(I):
(A) The balance sheet carrying value of all of the national bank or
Federal savings association's on-balance sheet assets, plus the value
of securities sold under a repo-style arrangement that are not included
on-balance sheet, less amounts deducted from tier 1 capital under Sec.
3.22(a), (c), and (d), and less the value of securities received in
security-for-security repo-style transactions, where the national bank
or Federal savings association acts as a securities lender and includes
the securities received in its on-balance sheet assets but has not sold
or re-hypothecated the securities received;
(B) The PFE for each derivative contract (including cleared
transactions except as provided in paragraph (c)(4)(ii)(I) of this
section) to which the national bank or Federal savings association is a
counterparty (or each single-product netting set of such transactions)
as determined under Sec. 3.34, but without regard to Sec. 3.34(b). A
national bank or Federal savings association may choose to adjust the
PFE for all credit derivatives or other similar instruments through
which it provides credit protection, as included in paragraph
(c)(4)(ii)(D) of this section, when calculating the PFE under Sec.
3.34, but without regard to Sec. 3.34(b), provided that it does not
adjust the net-to-gross ratio (NGR). A national bank or Federal savings
association that makes such election must do so consistently over time
for the calculation of the PFE for all credit derivative contracts or
similar instruments through which it provides credit protection;
(C) The amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
national bank or Federal savings association's on-balance sheet assets,
except if such cash collateral is all or part of variation margin that
satisfies the following requirements in paragraphs (c)(4)(ii)(C)(1)
through (c)(4)(ii)(C)(5) of this section. Cash variation margin that
satisfies the requirements in paragraphs (c)(4)(ii)(C)(1) through
(c)(4)(ii)(C)(5) of this section may only be used to reduce the current
credit exposure of the derivative contract, calculated as described in
Sec. 3.34(a), and not the PFE. In the calculation of the NGR described
in Sec. 3.34(a)(2)(ii)(B), cash variation
[[Page 24609]]
margin that satisfies the requirements in paragraphs (c)(4)(ii)(C)(1)
through (5) of this section may not reduce the net current credit
exposure or the gross current credit exposure.
(1) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated;
(2) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(3) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contracts, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(4) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph, currency of
settlement means any currency for settlement specified in the governing
qualifying master netting agreement, the credit support annex to the
qualifying master netting agreement, or in the governing rules for a
cleared transaction; and
(5) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction. The qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
(D) The effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
derivative contract) of a credit derivative, or other similar
instrument, through which the national bank or Federal savings
association provides credit protection, provided that:
(1) The national bank or Federal savings association may reduce the
effective notional principal amount of the credit derivative by the
amount of any reduction in the mark-to-fair value of the credit
derivative if the reduction is recognized in common equity tier 1
capital;
(2) The national bank or Federal savings association may reduce the
effective notional principal amount of the credit derivative by the
effective notional principal amount of a purchased credit derivative or
other similar instrument, provided that the remaining maturity of the
purchased credit derivative is equal to or greater than the remaining
maturity of the credit derivative through which the national bank or
Federal savings association provides credit protection and that:
(i) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative is
to the same legal entity and ranks pari passu with, or is junior to,
the reference exposure of the credit derivative through which the
national bank or Federal savings association provides credit
protection; or
(ii) With respect to a credit derivative that references multiple
exposures, such as securitization exposures, the reference exposures of
the purchased credit derivative are to the same legal entities and rank
pari passu with the reference exposures of the credit derivative
through which the national bank or Federal savings association provides
credit protection, and the level of seniority of the purchased credit
derivative ranks pari passu to the level of seniority of the credit
derivative through which the national bank or Federal savings
association provides credit protection.
(iii) Where a national bank or Federal savings association has
reduced the effective notional amount of a credit derivative through
which the national bank or Federal savings association provides credit
protection in accordance with paragraph (c)(4)(ii)(D)(1) of this
section, the national bank or Federal savings association must also
reduce the effective notional principal amount of a purchased credit
derivative, used to offset the credit derivative through which the
national bank or Federal savings association provides credit
protection, by the amount of any increase in the mark-to-fair value of
the purchased credit derivative that is recognized in common equity
tier 1 capital; and
(iv) Where the national bank or Federal savings association
purchases credit protection through a total return swap and records the
net payments received on a credit derivative through which the national
bank or Federal savings association provides credit protection in net
income, but does not record offsetting deterioration in the mark-to-
fair value of the credit derivative through which the national bank or
Federal savings association provides credit protection in net income
(either through reductions in fair value or by additions to reserves),
the national bank or Federal savings association may not use the
purchased credit protection to offset the effective notional principal
amount of the credit derivative through which the national bank or
Federal savings association provides credit protection.
(E) Where a national bank or Federal savings association acting as
a principal has more than one repo-style transaction with the same
counterparty and has applied the GAAP offset for repo-style
transactions, and the criteria in paragraphs (c)(4)(ii)(E)(1) through
(3) of this section are not satisfied, the gross value of receivables
associated with the repo-style transactions less any on-balance sheet
receivables amount associated with these repo-style transactions
included under paragraph (c)(4)(ii)(A) of this section.
(1) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(2) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(3) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement. That is, the cash
flows of the transactions are equivalent, in effect, to a single net
amount on the settlement date. To achieve this result, both
transactions must be settled through the same settlement system and the
settlement arrangements must be supported by cash or intraday credit
facilities intended to ensure that settlement of both transactions will
occur by the end of the business day, and the settlement of the
underlying securities does not interfere with the net cash settlement.
(F) The counterparty credit risk of a repo-style transaction,
including where the national bank or Federal savings association acts
as an agent for a repo-style transaction, calculated as follows:
(1) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for transactions
with a counterparty must be calculated on a transaction by transaction
basis, such that each transaction i is treated as its own netting set,
in accordance with the following formula, where Ei is the
fair value of the
[[Page 24610]]
instruments, gold, or cash that the national bank or Federal savings
association has lent, sold subject to repurchase, or provided as
collateral to the counterparty, and Ci is the fair value of
the instruments, gold, or cash that the national bank or Federal
savings association has borrowed, purchased subject to resale, or
received as collateral from the counterparty:
{time} Ei* = max {0, [Ei - Ci]{time} ;
and
(2) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as the
greater of zero and the total fair value of the instruments, gold, or
cash that the national bank or Federal savings association has lent,
sold subject to repurchase or provided as collateral to a counterparty
for all transactions included in the qualifying master netting
agreement ([sum]Ei), less the total fair value of the
instruments, gold, or cash that the national bank or Federal savings
association borrowed, purchased subject to resale or received as
collateral from the counterparty for those transactions
([sum]Ci), in accordance with the following formula:
E* = max {0, [[sum]Ei - [sum]Ci]{time}
(G) If a national bank or Federal savings association acting as an
agent for a repo-style transaction provides a guarantee to a customer
of the security or cash its customer has lent or borrowed with respect
to the performance of the customer's counterparty and the guarantee is
not limited to the difference between the fair value of the security or
cash its customer has lent and the fair value of the collateral the
borrower has provided, the amount of the guarantee that is greater than
the difference between the fair value of the security or cash its
customer has lent and the value of the collateral the borrower has
provided.
(H) The credit equivalent amount of all off-balance sheet exposures
of the national bank or Federal savings association, excluding repo-
style transactions and derivatives, determined using the applicable
credit conversation factor under Sec. 3.33(b), provided, however, that
the minimum credit conversion factor that may be assigned to an off-
balance sheet exposure under this paragraph is 10 percent.
(I) Requirements for a national bank or Federal savings association
that is a clearing member:
(1) A clearing member national bank or Federal savings association
that guarantees the performance of a clearing member client with
respect to a cleared transaction must treat its exposure to the
clearing member client as a derivative contract for purposes of
determining its total leverage exposure.
(2) A clearing member national bank or Federal savings association
that guarantees the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client must treat its exposure
to the CCP as a derivative contract for purposes of determining its
total leverage exposure. A clearing member national bank or Federal
savings association that does not guarantee the performance of a CCP
with respect to a transaction cleared on behalf of a clearing member
client may exclude its exposure to the CCP for purposes of determining
its total leverage exposure.
* * * * *
0
4. Section 3.172 is amended by adding paragraph (d) to read as follows:
Sec. 3.172 Disclosure requirements.
* * * * *
(d) Except as otherwise provided in paragraph (b) of this section,
an advanced approaches national bank or Federal savings association
must publicly disclose each quarter its supplementary leverage ratio
and its components as calculated under subpart B of this part in
compliance with paragraph (c) of this section; provided, however, the
disclosures required under this paragraph are required without regard
to whether the national bank or Federal savings association has
completed the parallel run process and has received notification from
the OCC pursuant to Sec. 3.121(d).
0
5. Section 3.173 is amended by:
0
a. Revising the introductory text of paragraph (a); and
0
b. Adding paragraph (c) and Table 13 to Sec. 3.173.
The revision and additions are set forth below.
Sec. 3.173 Disclosures by certain advanced approaches national banks
and Federal savings associations.
(a) Except as provided in Sec. 3.172(b), a national bank or
Federal savings association described in Sec. 3.172(b) must make the
disclosures described in Tables 1 through 13 to Sec. 3.173. The
national bank or Federal savings association must make the disclosures
required under Tables 1 through 12 publicly available for each of the
last three years (that is, twelve quarters) or such shorter period
beginning on January 1, 2014. The national bank or Federal savings
association must make the disclosures required under Table 13 publicly
available beginning on January 1, 2015.
* * * * *
(c) Except as provided in Sec. 3.172(b), a national bank or
Federal savings association described in Sec. 3.172(d) must make the
disclosure described in Table 13 to Sec. 3.173; provided, however, the
disclosures required under this paragraph are required without regard
to whether the national bank or Federal savings association has
completed the parallel run process and has received notification from
the OCC pursuant to Sec. 3.121(d). The national bank or Federal
savings association must make these disclosures publicly available
beginning on January 1, 2015.
Table 13 to Sec. 3.173
------------------------------------------------------------------------
Dollar amounts in thousands
-------------------------------------------
Tril Bil Mil Thou
------------------------------------------------------------------------
Part 1: Summary comparison
of accounting assets and
total leverage exposure
------------------------------------------------------------------------
1 Total consolidated assets
as reported in published
financial statements.......
2 Adjustment for investments
in banking, financial,
insurance or commercial
entities that are
consolidated for accounting
purposes but outside the
scope of regulatory
consolidation..............
3 Adjustment for fiduciary
assets recognized on
balance sheet but excluded
from total leverage
exposure...................
4 Adjustment for derivative
exposures..................
5 Adjustment for repo-style
transactions...............
6 Adjustment for off-balance
sheet exposures (that is,
conversion to credit
equivalent amounts of off-
balance sheet exposures)...
7 Other adjustments.........
[[Page 24611]]
8 Total leverage exposure...
------------------------------------------------------------------------
Part 2: Supplementary
leverage ratio
------------------------------------------------------------------------
On-balance sheet exposures
------------------------------------------------------------------------
1 On-balance sheet assets
(excluding on-balance sheet
assets for repo-style
transactions and derivative
exposures, but including
cash collateral received in
derivative transactions)...
2 LESS: Amounts deducted
from tier 1 capital........
3 Total on-balance sheet
exposures (excluding on-
balance sheet assets for
repo-style transactions and
derivative exposures, but
including cash collateral
received in derivative
transactions) (sum of lines
1 and 2)...................
------------------------------------------------------------------------
Derivative exposures
------------------------------------------------------------------------
4 Replacement cost for
derivative exposures (that
is, net of cash variation
margin)....................
5 Add-on amounts for
potential future exposure
(PFE) for derivatives
exposures..................
6 Gross-up for cash
collateral posted if
deducted from the on-
balance sheet assets,
except for cash variation
margin.....................
7 LESS: Deductions of
receivable assets for cash
variation margin posted in
derivatives transactions,
if included in on-balance
sheet assets...............
8 LESS: Exempted CCP leg of
client-cleared transactions
9 Effective notional
principal amount of sold
credit protection..........
10 LESS: Effective notional
principal amount offsets
and PFE adjustments for
sold credit protection.....
11 Total derivative
exposures (sum of lines 4
to 10).....................
------------------------------------------------------------------------
Repo-style transactions
------------------------------------------------------------------------
12 On-balance sheet assets
for repo-style
transactions, except
include the gross value of
receivables for reverse
repurchase transactions.
Exclude from this item the
value of securities
received in a security-for-
security repo-style
transaction where the
securities lender has not
sold or re-hypothecated the
securities received.
Include in this item the
value of securities sold
under a repo-style
arrangement................
13 LESS: Reduction of the
gross value of receivables
in reverse repurchase
transactions by cash
payables in repurchase
transactions under netting
agreements.................
14 Counterparty credit risk
for all repo-style
transactions...............
15 Exposure for repo-style
transactions where a
banking organization acts
as an agent................
16 Total exposures for repo-
style transactions (sum of
lines 12 to 15)............
------------------------------------------------------------------------
Other off-balance sheet
exposures
------------------------------------------------------------------------
17 Off-balance sheet
exposures at gross notional
amounts....................
18 LESS: Adjustments for
conversion to credit
equivalent amounts.........
19 Off-balance sheet
exposures (sum of lines 17
and 18)....................
------------------------------------------------------------------------
Capital and total leverage
exposure
------------------------------------------------------------------------
20 Tier 1 capital...........
21 Total leverage exposure
(sum of lines 3, 11, 16 and
19)........................
------------------------------------------------------------------------
Supplementary leverage ratio
------------------------------------------------------------------------
22 Supplementary leverage
ratio...................... (in percent)
------------------------------------------------------------------------
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, part 217 of chapter II
of title 12 of the Code of Federal Regulations is proposed to be
amended as follows:
PART 217--CAPITAL ADEQUACY OF BOARD-RELATED INSTITUTIONS
0
6. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
0
7. In Sec. 217.2, revise the definition of ``total leverage exposure''
to read as follows:
Sec. 217.2 Definitions.
* * * * *
Total leverage exposure is defined in Sec. 217.10(c)(4)(ii).
* * * * *
0
8. Revise Sec. 217.10(c)(4) to read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(c) * * *
[[Page 24612]]
(4) Supplementary leverage ratio. (i) An advanced approaches Board-
regulated institution's supplementary leverage ratio is the ratio of
its tier 1 capital calculated as of the last day of each reporting
quarter to total leverage exposure calculated as the arithmetic mean of
the total leverage exposure calculated as of each day of the reporting
quarter, using the applicable deductions under Sec. 217.22(a), (c),
and (d) as of the last day of the previous reporting quarter.
(ii) For purposes of this part, total leverage exposure means the
sum of the items described as follows in paragraphs (c)(4)(ii)(A)
through (H) of this section, as adjusted by any applicable requirement
for a clearing member Board-regulated institution described in
paragraph (c)(4)(ii)(I):
(A) The balance sheet carrying value of all of the Board-regulated
institution's on-balance sheet assets, plus the value of securities
sold under a repo-style arrangement that are not included on balance
sheet, less amounts deducted from tier 1 capital under Sec. 217.22
(a), (c), and (d), and less the value of securities received in
security-for-security repo-style transactions, where the Board-
regulated institution acts as a securities lender and includes the
securities received in its on-balance sheet assets but has not sold or
re-hypothecated the securities received;
(B) The PFE for each derivative contract (including cleared
transactions except as provided in paragraph (c)(4)(ii)(I) of this
section) to which the Board-regulated institution is a counterparty (or
each single-product netting set of such transactions) as determined
under Sec. 217.34, but without regard to Sec. 217.34(b). A Board-
regulated institution may choose to adjust the PFE for all credit
derivatives or other similar instruments through which it provides
credit protection, as included in paragraph (c)(4)(ii)(D) of this
section, when calculating the PFE under Sec. 217.34, but without
regard to Sec. 217.34(b), provided that it does not adjust the net-to-
gross ratio (NGR). A Board-regulated institution that makes such
election must do so consistently over time for the calculation of the
PFE for all credit derivative contracts or similar instruments through
which it provides credit protection;
(C) The amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
banking organization's on-balance sheet assets, except if such cash
collateral is all or part of variation margin that satisfies the
following requirements in paragraphs (c)(4)(ii)(C)(1) through (5) of
this section. Cash variation margin that satisfies the requirements in
paragraphs (c)(4)(ii)(C)(1) through (5) of this section may only be
used to reduce the current credit exposure of the derivative contract,
calculated as described in Sec. 217.34(a), and not the PFE. In the
calculation of the NGR described in Sec. 217.34(a)(2)(ii)(B), cash
variation margin that satisfies the requirements in paragraphs
(c)(4)(ii)(C)(1) through (5) of this section may not reduce the net
current credit exposure or the gross current credit exposure.
(1) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated;
(2) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(3) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contract, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(4) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract. For purposes of this paragraph, currency of settlement means
any currency for settlement specified in the governing qualifying
master netting agreement, the credit support annex to the qualifying
master netting agreement, or in the governing rules for a cleared
transaction; and
(5) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction. The qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
(D) The effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
derivative contract) of a credit derivative, or other similar
instrument, through which the Board-regulated institution provides
credit protection, provided that:
(1) The Board-regulated institution may reduce the effective
notional principal amount of the credit derivative by the amount of any
reduction in the mark-to-fair value of the credit derivative if the
reduction is recognized in common equity tier 1 capital;
(2) The Board-regulated institution may reduce the effective
notional principal amount of the credit derivative by the effective
notional principal amount of a purchased credit derivative, or other
similar instrument, provided that the remaining maturity of the
purchased credit derivative is equal to or greater than the remaining
maturity of the credit derivative through which the Board-regulated
institution provides credit protection and that:
(i) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative is
to the same legal entity and ranks pari passu with, or is junior to,
the reference exposure of the credit derivative through which the
Board-regulated institution provides credit protection; or
(ii) With respect to a credit derivative that references multiple
exposures, such as securitization exposures, the reference exposures of
the purchased credit derivative are to the same legal entities and rank
pari passu with the reference exposures of the credit derivative
through which the Board-regulated institution provides credit
protection, and the level of seniority of the purchased credit
derivative ranks pari passu to the level of seniority of the credit
derivative under which the Board-regulated institution provides credit
protection.
(iii) Where a Board-regulated institution has reduced the effective
notional principal amount of a credit derivative through which the
Board-regulated institution provides credit protection in accordance
with paragraph (c)(4)(ii)(D)(1) of this section, the Board-regulated
institution must also reduce the effective notional principal amount of
a purchased credit derivative, used to offset the credit derivative
through which the Board-regulated institution provides credit
protection, by the amount of any increase in the mark-to-fair value of
the purchased credit derivative that is recognized in common equity
tier 1 capital; and
(iv) Where the Board-regulated institution purchases credit
protection through a total return swap and records the net payments
received on a credit derivative through which the Board-regulated
institution provides credit
[[Page 24613]]
protection in net income, but does not record offsetting deterioration
in the mark-to-fair value of the credit derivative through which the
Board-regulated institution provides credit protection in net income
(either through reductions in fair value or by additions to reserves),
the Board-regulated institution may not use the purchased credit
protection to offset the effective notional principal amount of the
credit derivative through which the Board-regulated institution
provides credit protection.
(E) Where a Board-regulated institution acting as a principal has
more than one repo-style transaction with the same counterparty and has
applied the GAAP offset for repo-style transactions, and the criteria
in paragraphs (c)(4)(ii)(E)(1) through (c)(4)(ii)(E)(3) of this section
are not satisfied, the gross value of receivables associated with the
repo-style transactions less any on-balance sheet receivables amount
associated with these repo-style transactions included under paragraph
(c)(4)(ii)(A) of this section.
(1) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(2) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(3) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement. That is, the cash
flows of the transactions are equivalent, in effect, to a single net
amount on the settlement date. To achieve this result, both
transactions must be settled through the same settlement system and the
settlement arrangements must be supported by cash or intraday credit
facilities intended to ensure that settlement of both transactions will
occur by the end of the business day, and the settlement of the
underlying securities does not interfere with the net cash settlement.
(F) The counterparty credit risk of a repo-style transaction,
including where the Board-regulated institution acts as an agent for a
repo-style transaction, calculated as follows:
(1) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for transactions
with a counterparty must be calculated on a transaction by transaction
basis, such that each transaction i is treated as its own netting set,
in accordance with the following formula, where Ei is the
fair value of the instruments, gold, or cash that the Board-regulated
institution has lent, sold subject to repurchase, or provided as
collateral to the counterparty, and Ci is the fair value of
the instruments, gold, or cash that the Board-regulated institution has
borrowed, purchased subject to resale, or received as collateral from
the counterparty:
Ei* = max {0, [Ei - Ci]{time} ;
and
(2) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as the
greater of zero and the total fair value of the instruments, gold, or
cash that the Board-regulated institution has lent, sold subject to
repurchase or provided as collateral to a counterparty for all
transactions included in the qualifying master netting agreement
([sum]Ei), less the total fair value of the instruments,
gold, or cash that the Board-regulated institution borrowed, purchased
subject to resale or received as collateral from the counterparty for
those transactions ([sum]Ci), in accordance with the
following formula:
E* = max {0, [[sum]Ei - [sum]Ci]{time}
(G) If a Board-regulated institution acting as an agent for a repo-
style transaction provides a guarantee to a customer of the security or
cash its customer has lent or borrowed with respect to the performance
of the customer's counterparty and the guarantee is not limited to the
difference between the fair value of the security or cash its customer
has lent and the fair value of the collateral the borrower has
provided, the amount of the guarantee that is greater than the
difference between the fair value of the security or cash its customer
has lent and the value of the collateral the borrower has provided.
(H) The credit equivalent amount of all off-balance sheet exposures
of a Board-regulated institution, excluding repo-style transactions and
derivatives, determined using the applicable credit conversation factor
under Sec. 217.33(b), provided, however, that the minimum credit
conversion factor that may be assigned to an off-balance sheet exposure
under this paragraph is 10 percent.
(I) Requirements for a Board-regulated institution that is a
clearing member:
(1) A clearing member Board-regulated institution that guarantees
the performance of a clearing member client with respect to a cleared
transaction must treat its exposure to the clearing member client as a
derivative contract for purposes of determining its total leverage
exposure.
(2) A clearing member Board-regulated institution that guarantees
the performance of a CCP with respect to a transaction cleared on
behalf of a clearing member client must treat its exposure to the CCP
as a derivative contract for purposes of determining its total leverage
exposure. A clearing member Board-regulated institution that does not
guarantee the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client may exclude its exposure
to the CCP for purposes of determining its total leverage exposure.
* * * * *
0
9. Amend Sec. 217.172 by adding a new paragraph (d) to read as
follows:
Sec. 217.172 Disclosure requirements.
* * * * *
(d) Except as otherwise provided in Sec. 217.2 (b), an advanced
approaches Board-regulated institution must publicly disclose each
quarter its supplementary leverage ratio and its components as
calculated under subpart B of this part in compliance with paragraph
(c) of this section; provided, however, the disclosures required under
this paragraph are required without regard to whether the Board-
regulated institution has completed the parallel run process and has
received notification from the Board pursuant to Sec. 217.121(d).
0
10. Amend Sec. 217.173 by adding a new paragraph (c) and Table 13 to
Sec. 217.173 to read as follows:
Sec. 217.173 Disclosures by certain advanced approaches Board-
regulated institutions.
* * * * *
(c) Except as otherwise provided in Sec. 217.172(b), a Board-
regulated institution described in Sec. 217.172(d) must make the
disclosures described in Table 13 to Sec. 217.173; provided, however,
the disclosures required under this paragraph are required without
regard to whether the Board-regulated institution has completed the
parallel run process and has received notification from the Board
pursuant to Sec. 217.121(d). The Board-regulated institution must make
these disclosures publicly available beginning on January 1, 2015.
[[Page 24614]]
Table 13 to Sec. 217.173--Supplementary Leverage Ratio
------------------------------------------------------------------------
Dollar amounts in thousands
-------------------------------------------
Tril Bil Mil Thou
------------------------------------------------------------------------
Part 1: Summary comparison
of accounting assets and
total leverage exposure
------------------------------------------------------------------------
1 Total consolidated assets
as reported in published
financial statements.......
2 Adjustment for investments
in banking, financial,
insurance or commercial
entities that are
consolidated for accounting
purposes but outside the
scope of regulatory
consolidation..............
3 Adjustment for fiduciary
assets recognized on
balance sheet but excluded
from total leverage
exposure...................
4 Adjustment for derivative
exposures..................
5 Adjustment for repo-style
transactions...............
6 Adjustment for off-balance
sheet exposures (that is,
conversion to credit
equivalent amounts of off-
balance sheet exposures)...
7 Other adjustments.........
8 Total leverage exposure...
------------------------------------------------------------------------
Part 2: Supplementary
leverage ratio
------------------------------------------------------------------------
On-balance sheet exposures
------------------------------------------------------------------------
1 On-balance sheet assets
(excluding on-balance sheet
assets for repo-style
transactions and derivative
exposures, but including
cash collateral received in
derivative transactions)...
2 LESS: Amounts deducted
from tier 1 capital........
3 Total on-balance sheet
exposures (excluding on-
balance sheet assets for
repo-style transactions and
derivative exposures, but
including cash collateral
received in derivative
transactions) (sum of lines
1 and 2)...................
------------------------------------------------------------------------
Derivative exposures
------------------------------------------------------------------------
4 Replacement cost for
derivative exposures (that
is, net of cash variation
margin)....................
5 Add-on amounts for
potential future exposure
(PFE) for derivatives
exposures..................
6 Gross-up for cash
collateral posted if
deducted from the on-
balance sheet assets,
except for cash variation
margin.....................
7 LESS: Deductions of
receivable assets for cash
variation margin posted in
derivatives transactions,
if included in on-balance
sheet assets...............
8 LESS: Exempted CCP leg of
client-cleared transactions
9 Effective notional
principal amount of sold
credit protection..........
10 LESS: Effective notional
principal amount offsets
and PFE adjustments for
sold credit protection.....
11 Total derivative
exposures (sum of lines 4
to 10).....................
------------------------------------------------------------------------
Repo-style transactions
------------------------------------------------------------------------
12 On-balance sheet assets
for repo-style
transactions, except
include the gross value of
receivables for reverse
repurchase transactions.
Exclude from this item the
value of securities
received in a security-for-
security repo-style
transaction where the
securities lender has not
sold or re-hypothecated the
securities received.
Include in this item the
value of securities sold
under a repo-style
arrangement................
13 LESS: Reduction of the
gross value of receivables
in reverse repurchase
transactions by cash
payables in repurchase
transactions under netting
agreements.................
14 Counterparty credit risk
for all repo-style
transactions...............
15 Exposure for repo-style
transactions where a
banking organization acts
as an agent................
16 Total exposures for repo-
style transactions (sum of
lines 12 to 15)............
------------------------------------------------------------------------
Other off-balance sheet
exposures
------------------------------------------------------------------------
17 Off-balance sheet
exposures at gross notional
amounts....................
18 LESS: Adjustments for
conversion to credit
equivalent amounts.........
19 Off-balance sheet
exposures (sum of lines 17
and 18)....................
------------------------------------------------------------------------
Capital and total leverage
exposure
------------------------------------------------------------------------
20 Tier 1 capital...........
21 Total leverage exposure
(sum of lines 3, 11, 16 and
19)........................
------------------------------------------------------------------------
Supplementary leverage ratio
------------------------------------------------------------------------
22 Supplementary leverage
ratio...................... (in percent)
------------------------------------------------------------------------
[[Page 24615]]
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend part 324 of chapter III of
Title 12, Code of Federal Regulations as follows:
PART 324--CAPITAL ADEQUACY
0
11. The authority citation for part 324 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233,
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242,
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160,
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386,
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note).
0
12. In Sec. 324.2, revise the definition of ``total leverage
exposure'' to read as follows:
Sec. 324.2 Definitions.
* * * * *
Total leverage exposure is defined in Sec. 324.10(c)(4)(ii).
* * * * *
0
13. Revise Sec. 324.10(c)(4) to read as follows:
Sec. 324.10 Minimum capital requirements.
* * * * *
(c) * * *
(4) Supplementary leverage ratio. (i) An advanced approaches FDIC-
supervised institution's supplementary leverage ratio is the ratio of
its tier 1 capital calculated as of the last day of each reporting
quarter to total leverage exposure calculated as the arithmetic mean of
the total leverage exposure calculated as of each day of the reporting
quarter, using the applicable deductions under Sec. 324.22(a), (c),
and (d) as of the last day of the previous reporting quarter.
(ii) For purposes of this part, total leverage exposure means the
sum of the items described as follows in paragraphs (c)(4)(ii)(A)
through (H) of this section, as adjusted by any applicable requirement
for clearing member FDIC-supervised institutions described in paragraph
(c)(4)(ii)(I):
(A) The balance sheet carrying value of all of the FDIC-supervised
institution's on-balance sheet assets, plus the value of securities
sold under a repo-style arrangement that are not included on-balance
sheet, less amounts deducted from tier 1 capital under Sec. 324.22(a),
(c), and (d), and less the value of securities received in security-
for-security repo-style transactions, where the FDIC-supervised
institution acts as a securities lender and includes the securities
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received;
(B) The PFE for each derivative contract (including cleared
transactions except as provided in paragraph (c)(4)(ii)(I) of this
section) to which the FDIC-supervised institution is a counterparty (or
each single-product netting set of such transactions) as determined
under Sec. 324.34, but without regard to Sec. 324.34(b). An FDIC-
supervised institution may choose to adjust the PFE for all credit
derivatives or other similar instruments through which it provides
credit protection, as included in paragraph (c)(4)(ii)(D) of this
section, when calculating the PFE under Sec. 324.34, but without
regard to Sec. 324.34(b), provided that it does not adjust the net-to-
gross ratio (NGR). An FDIC-supervised institution that makes such
election must do so consistently over time for the calculation of the
PFE for all credit derivative contracts or similar instruments through
which it provides credit protection;
(C) The amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
FDIC-supervised institution's on-balance sheet assets, except if such
cash collateral is all or part of variation margin that satisfies the
following requirements in paragraphs (c)(4)(ii)(C)(1) through (5) of
this section. Cash variation margin that satisfies the requirements in
paragraphs (c)(4)(ii)(C)(1) through (5) of this section may only be
used to reduce the current credit exposure of the derivative contract,
calculated as described in section 324.34(a)(2)(ii)(B), and not the
PFE. In the calculation of the NGR described in Sec.
324.34(a)(2)(ii)(B), cash variation margin that satisfies the
requirements in paragraphs (a)(2)(ii)(C)(1) through (5) of this section
may not reduce the net current credit exposure or the gross current
credit exposure.
(1) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated;
(2) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(3) The variation margin transferred under the derivative contract
or the governing rules for a cleared transaction is the full amount
that is necessary to fully extinguish the net current credit exposure
to the counterparty of the derivative contracts, subject to the
threshold and minimum transfer amounts applicable to the counterparty
under the terms of the derivative contract or the governing rules for a
cleared transaction;
(4) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph, currency of
settlement means any currency for settlement specified in the governing
qualifying master netting agreement and the credit support annex to the
qualifying master netting agreement, or in the governing rules for a
cleared transaction; and
(5) The derivative contract and the variation margin are governed
by a qualifying master netting agreement between the legal entities
that are the counterparties to the derivative contract or by the
governing rules for a cleared transaction. The qualifying master
netting agreement or the governing rules for a cleared transaction must
explicitly stipulate that the counterparties agree to settle any
payment obligations on a net basis, taking into account any variation
margin received or provided under the contract if a credit event
involving either counterparty occurs;
(D) The effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
derivative contract) of a credit derivative, or other similar
instrument, through which the FDIC-supervised institution provides
credit protection, provided that:
(1) The FDIC-supervised institution may reduce the effective
notional principal amount of the credit derivative by the amount of any
reduction in the mark-to-fair value of the credit derivative if the
reduction is recognized in common equity tier 1 capital;
(2) The FDIC-supervised institution may reduce the effective
notional principal amount of the credit derivative by the effective
notional principal amount of a purchased credit derivative or other
similar instrument, provided that the remaining maturity of the
purchased credit derivative is equal to or greater than the remaining
maturity of the credit derivative through which the FDIC-supervised
institution provides credit protection and that:
(i) With respect to a credit derivative that references a single
exposure, the
[[Page 24616]]
reference exposure of the purchased credit derivative is to the same
legal entity and ranks pari passu with, or is junior to, the reference
exposure of the credit derivative through which the FDIC-supervised
institution provides credit protection; or
(ii) With respect to a credit derivative that references multiple
exposures, such as securitization exposures, the reference exposures of
the purchased credit derivative are to the same legal entities and rank
pari passu with the reference exposures of the credit derivative
through which the FDIC-supervised institution provides credit
protection, and the level of seniority of the purchased credit
derivative ranks pari passu to the level of seniority of the credit
derivative through which the FDIC-supervised institution provides
credit protection.
(iii) Where an FDIC-supervised institution has reduced the
effective notional amount of a credit derivative through which the
FDIC-supervised institution provides credit protection in accordance
with paragraph (c)(4)(ii)(D)(1) of this section, the FDIC-supervised
institution must also reduce the effective notional principal amount of
a purchased credit derivative, used to offset the credit derivative
through which the FDIC-supervised institution provides credit
protection, by the amount of any increase in the mark-to-fair value of
the purchased credit derivative that is recognized in common equity
tier 1 capital; and
(iv) Where the FDIC-supervised institution purchases credit
protection through a total return swap and records the net payments
received on a credit derivative through which the FDIC-supervised
institution provides credit protection in net income, but does not
record offsetting deterioration in the mark-to-fair value of the credit
derivative through which the FDIC-supervised institution provides
credit protection in net income (either through reductions in fair
value or by additions to reserves), the FDIC-supervised institution may
not use the purchased credit protection to offset the effective
notional principal amount of the related credit derivative through
which the FDIC-supervised institution provides credit protection.
(E) Where an FDIC-supervised institution acting as a principal has
more than one repo-style transaction with the same counterparty and has
applied the GAAP offset for repo-style transactions, and the criteria
in paragraphs (c)(4)(ii)(E)(1) through (3) of this section are not
satisfied, the gross value of receivables associated with the repo-
style transactions less any on-balance sheet receivables amount
associated with these repo-style transactions included under paragraph
(c)(4)(ii)(A) of this section.
(1) The offsetting transactions have the same explicit final
settlement date under their governing agreements;
(2) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(3) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement. That is, the cash
flows of the transactions are equivalent, in effect, to a single net
amount on the settlement date. To achieve this result, both
transactions must be settled through the same settlement system and the
settlement arrangements must be supported by cash or intraday credit
facilities intended to ensure that settlement of both transactions will
occur by the end of the business day, and the settlement of the
underlying securities does not interfere with the net cash settlement.
(F) The counterparty credit risk of a repo-style transaction,
including where the FDIC-supervised institution acts as an agent for a
repo-style transaction, calculated as follows:
(1) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for transactions
with a counterparty must be calculated on a transaction by transaction
basis, such that each transaction i is treated as its own netting set,
in accordance with the following formula, where Ei is the
fair value of the instruments, gold, or cash that the FDIC-supervised
institution has lent, sold subject to repurchase, or provided as
collateral to the counterparty, and Ci is the fair value of
the instruments, gold, or cash that the FDIC-supervised institution has
borrowed, purchased subject to resale, or received as collateral from
the counterparty:
Ei* = max {0, [Ei - Ci]{time} ; and
(2) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as the
greater of zero and the total fair value of the instruments, gold, or
cash that the FDIC-supervised institution has lent, sold subject to
repurchase or provided as collateral to a counterparty for all
transactions included in the qualifying master netting agreement
([sum]Ei), less the total fair value of the instruments,
gold, or cash that the FDIC-supervised institution borrowed, purchased
subject to resale or received as collateral from the counterparty for
those transactions ([sum]Ci), in accordance with the
following formula:
E* = max {0, [[sum]Ei - [sum]Ci]{time}
(G) If an FDIC-supervised institution acting as an agent for a
repo-style transaction provides a guarantee to a customer of the
security or cash its customer has lent or borrowed with respect to the
performance of the customer's counterparty and the guarantee is not
limited to the difference between the fair value of the security or
cash its customer has lent and the fair value of the collateral the
borrower has provided, the amount of the guarantee that is greater than
the difference between the fair value of the security or cash its
customer has lent and the value of the collateral the borrower has
provided.
(H) The credit equivalent amount of all off-balance sheet exposures
of the FDIC-supervised institution, excluding repo-style transactions
and derivatives, determined using the applicable credit conversation
factor under Sec. 324.33(b), provided, however, that the minimum
credit conversion factor that may be assigned to an off-balance sheet
exposure under this paragraph is 10 percent.
(I) Requirements for an FDIC-supervised institution that is a
clearing member:
(1) A clearing member FDIC-supervised institution that guarantees
the performance of a clearing member client with respect to a cleared
transaction must treat its exposure to the clearing member client as a
derivative contract for purposes of determining its total leverage
exposure.
(2) A clearing member FDIC-supervised institution that guarantees
the performance of a CCP with respect to a transaction cleared on
behalf of a clearing member client must treat its exposure to the CCP
as a derivative contract for purposes of determining its total leverage
exposure. A clearing member FDIC-supervised institution that does not
guarantee the performance of a CCP with respect to a transaction
cleared on behalf of a clearing member client may exclude its exposure
to the CCP for purposes of determining its total leverage exposure.
0
14. Section 324.172 is amended by adding paragraph (d) to read as
follows:
Sec. 324.172 Disclosure requirements.
* * * * *
(d) Except as otherwise provided in paragraph (b) of this section,
an
[[Page 24617]]
advanced approaches FDIC-supervised institution must publicly disclose
each quarter its supplementary leverage ratio and its components as
calculated under subpart B of this part in compliance with paragraph
(c) of this section; provided, however, the disclosures required under
this paragraph are required without regard to whether the FDIC-
supervised institution has completed the parallel run process and has
received notification from the FDIC pursuant to Sec. 324.121(d).
0
15. Amend Sec. 324.173 as follows:
0
a. Revise the introductory text of paragraph (a); and
0
b. Add paragraph (c) and Table 13 to Sec. 3.173.
The revision and additions are set forth below.
Sec. 324.173 Disclosures by certain advanced approaches FDIC-
supervised institutions.
(a) Except as provided in Sec. 324.172(b), an FDIC-supervised
institution described in Sec. 324.172(b) must make the disclosures
described in Tables 1 through 13 to Sec. 324.173. The FDIC-supervised
institution must make the disclosures required under Tables 1 through
12 publicly available for each of the last three years (that is, twelve
quarters) or such shorter period beginning on January 1, 2014. The
FDIC-supervised institution must make the disclosures required under
Table 13 publicly available beginning on January 1, 2015.
* * * * *
(c) Except as provided in Sec. 324.172(b), an FDIC-supervised
institution described in Sec. 324.172(d) must make the disclosures
described in Table 13 to Sec. 324.173; provided, however, the
disclosures required under this paragraph are required without regard
to whether the FDIC-supervised institution has completed the parallel
run process and has received notification from the FDIC pursuant to
Sec. 324.121(d). The FDIC-supervised institution must make these
disclosures publicly available beginning on January 1, 2015.
Table 13 to Sec. 324.173 Supplementary Leverage Ratio
------------------------------------------------------------------------
Dollar amounts in thousands
-------------------------------------------
Tril Bil Mil Thou
------------------------------------------------------------------------
Part 1: Summary comparison
of accounting assets and
total leverage exposure
------------------------------------------------------------------------
1 Total consolidated assets
as reported in published
financial statements.......
2 Adjustment for investments
in banking, financial,
insurance or commercial
entities that are
consolidated for accounting
purposes but outside the
scope of regulatory
consolidation..............
3 Adjustment for fiduciary
assets recognized on
balance sheet but excluded
from total leverage
exposure...................
4 Adjustment for derivative
exposures..................
5 Adjustment for repo-style
transactions...............
6 Adjustment for off-balance
sheet exposures (that is,
conversion to credit
equivalent amounts of off-
balance sheet exposures)...
7 Other adjustments.........
8 Total leverage exposure...
------------------------------------------------------------------------
Part 2: Supplementary
leverage ratio
------------------------------------------------------------------------
On-balance sheet exposures
------------------------------------------------------------------------
1 On-balance sheet assets
(excluding on-balance sheet
assets for repo-style
transactions and derivative
exposures, but including
cash collateral received in
derivative transactions)...
2 LESS: Amounts deducted
from tier 1 capital........
3 Total on-balance sheet
exposures (excluding on-
balance sheet assets for
repo-style transactions and
derivative exposures, but
including cash collateral
received in derivative
transactions) (sum of lines
1 and 2)...................
------------------------------------------------------------------------
Derivative exposures
------------------------------------------------------------------------
4 Replacement cost for
derivative exposures (that
is, net of cash variation
margin)....................
5 Add-on amounts for
potential future exposure
(PFE) for derivatives
exposures..................
6 Gross-up for cash
collateral posted if
deducted from the on-
balance sheet assets,
except for cash variation
margin.....................
7 LESS: Deductions of
receivable assets for cash
variation margin posted in
derivatives transactions,
if included in on-balance
sheet assets...............
8 LESS: Exempted CCP leg of
client-cleared transactions
9 Effective notional
principal amount of sold
credit protection..........
10 LESS: Effective notional
principal amount offsets
and PFE adjustments for
sold credit protection.....
11 Total derivative
exposures (sum of lines 4
to 10).....................
------------------------------------------------------------------------
Repo-style transactions
------------------------------------------------------------------------
12 On-balance sheet assets
for repo-style
transactions, except
include the gross value of
receivables for reverse
repurchase transactions.
Exclude from this item the
value of securities
received in a security-for-
security repo-style
transaction where the
securities lender has not
sold or re-hypothecated the
securities received.
Include in this item the
value of securities sold
under a repo-style
arrangement................
13 LESS: Reduction of the
gross value of receivables
in reverse repurchase
transactions by cash
payables in repurchase
transactions under netting
agreements.................
14 Counterparty credit risk
for all repo-style
transactions...............
[[Page 24618]]
15 Exposure for repo-style
transactions where a
banking organization acts
as an agent................
16 Total exposures for repo-
style transactions (sum of
lines 12 to 15)............
------------------------------------------------------------------------
Other off-balance sheet
exposures
------------------------------------------------------------------------
17 Off-balance sheet
exposures at gross notional
amounts....................
18 LESS: Adjustments for
conversion to credit
equivalent amounts.........
19 Off-balance sheet
exposures (sum of lines 17
and 18)....................
------------------------------------------------------------------------
Capital and total leverage
exposure
------------------------------------------------------------------------
20 Tier 1 capital...........
21 Total leverage exposure
(sum of lines 3, 11, 16 and
19)........................
------------------------------------------------------------------------
Supplementary leverage ratio
------------------------------------------------------------------------
22 Supplementary leverage
ratio...................... (in percent)
------------------------------------------------------------------------
Dated: April 8, 2014.
Thomas J. Curry,
Comptroller of the Currency.
By Order of the Board of Governors of the Federal Reserve
System, April 10, 2014.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 8th day of April, 2014.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2014-09357 Filed 4-30-14; 8:45 am]
BILLING CODE P