Risk-Based Capital Guidelines; Market Risk Measure; Securities Borrowing Transactions, 8932-8938 [06-1533]

Download as PDF 8932 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations entities’’ under 5 U.S.C. 601. These notfor-profit committees do not meet the definition of ‘‘small organization,’’ which requires that the enterprise be independently owned and operated and not dominant in its field. 5 U.S.C. 601(4). State political party committees are not independently owned and operated because they are not financed and controlled by a small identifiable group of individuals, and they are affiliated with the larger national political party organizations. In addition, the State political party committees representing the Democratic and Republican parties have a major controlling influence within the political arena of their State and are thus dominant in their field. District and local party committees are generally considered affiliated with the State committees and need not be considered separately. To the extent that any State party committees representing minor political parties might be considered ‘‘small organizations,’’ the number affected by this rule is not substantial. List of Subjects in 11 CFR Part 100 Elections. I For the reasons set out in the preamble, Subchapter A of Chapter 1 of Title 11 of the Code of Federal Regulations is amended as follows: PART 100—SCOPE AND DEFINITIONS (2 U.S.C. 431) 1. The authority citation for 11 CFR part 100 continues to read as follows: I Authority: 2 U.S.C. 431, 434, and 438(a)(8). 2. In section 100.24, paragraph (a) is revised to read as follows: I vote. Voter registration activity includes, but is not limited to, printing and distributing registration and voting information, providing individuals with voter registration forms, and assisting individuals in the completion and filing of such forms. (3) Get-out-the-vote activity means contacting registered voters by telephone, in person, or by other individualized means, to assist them in engaging in the act of voting. Get-outthe-vote activity includes, but is not limited to: (i) Providing to individual voters information such as the date of the election, the times when polling places are open, and the location of particular polling places; and (ii) Offering to transport or actually transporting voters to the polls. (4) Voter identification means acquiring information about potential voters, including, but not limited to, obtaining voter lists and creating or enhancing voter lists by verifying or adding information about the voters’ likelihood of voting in an upcoming election or their likelihood of voting for specific candidates. The date a voter list is acquired shall govern whether a State, district, or local party committee has obtained a voter list within the meaning of this section. * * * * * Dated: February 10, 2006. Michael E. Toner, Chairman, Federal Election Commission. [FR Doc. 06–1679 Filed 2–21–06; 8:45 am] BILLING CODE 6715–01–P cprice-sewell on PROD1PC66 with RULES § 100.24 Federal Election Activity (2 U.S.C. 431(20)). (a) As used in this section, and in part 300 of this chapter, (1) In connection with an election in which a candidate for Federal office appears on the ballot means: (i) The period of time beginning on the date of the earliest filing deadline for access to the primary election ballot for Federal candidates as determined by State law, or in those States that do not conduct primaries, on January 1 of each even-numbered year and ending on the date of the general election, up to and including the date of any general runoff. (ii) The period beginning on the date on which the date of a special election in which a candidate for Federal office appears on the ballot is set and ending on the date of the special election. (2) Voter registration activity means contacting individuals by telephone, in person, or by other individualized means to assist them in registering to VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket No. 06–02] RIN 1557–AC90 FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 225 [Regulation H and Y; Docket No. R–1087] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 325 RIN 3064–AC46 Risk-Based Capital Guidelines; Market Risk Measure; Securities Borrowing Transactions Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation. ACTION: Final rule. AGENCIES: 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 final rule that amends their market risk rules to revise the risk-based capital treatment for cash collateral that is posted in connection with securities borrowing transactions. This final rule will make permanent, and expand the scope of, an interim final rule issued in 2000 (the interim rule) that reduced the capital requirement for certain cashcollateralized securities borrowing transactions of banks and bank holding companies (banking organizations) that have adopted the market risk rule. This action more appropriately aligns the capital requirements for these transactions with the risk involved and provides a capital treatment for U.S. banking organizations that is more in line with the capital treatment to which their domestic and foreign competitors are subject. DATES: Effective: February 22, 2006. FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert, Capital Policy (202) 874–6022, or Carl Kaminski, Attorney, Legislative and Regulatory Activities Division (202) 874–5090, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. E:\FR\FM\22FER1.SGM 22FER1 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations Board: Norah Barger, Associate Director, Division of Banking Supervision and Regulation, (202) 452– 2402, David Adkins, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, (202) 452– 5259, Juan C. Climent, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, (202) 872– 7526, or Mark Van Der Weide, Senior Counsel, Legal Division, (202) 452– 2263. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: Jason Cave, Associate Director, Division of Supervision and Consumer Protection, (202) 898–3548, John Feid, Senior Capital Markets Specialist, Division of Supervision and Consumer Protection, (202) 898–8649, or Michael B. Phillips, Counsel, (202) 898–3581, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. SUPPLEMENTARY INFORMATION: I. Background cprice-sewell on PROD1PC66 with RULES Neither the July 1988 agreement entitled ‘‘International Convergence of Capital Measurement and Capital Standards’’ (Basel Accord) nor the riskbased capital guidelines adopted by the Agencies in 1989 (the 1989 rules) specifically address securities borrowing transactions.1 At that time, the involvement of U.S. banking organizations in corporate debt and equity securities trading activities was limited. However, in recent years, U.S. banking organizations have been authorized to engage in, and have engaged in, trading activities to a significantly greater extent. Securities borrowing transactions serve an important function in the operation of securities markets. They are used in conjunction with short sales, securities fails (securities sold but not made available for delivery on the settlement date), and option and arbitrage positions. Securities are also borrowed in order to be pledged against public fund deposits. Securities borrowing enhances market efficiency and 1 The Basel Accord was developed by the Basel Committee on Banking Supervision and endorsed by the central bank governors of the Group of Ten (G–10) countries. The Basel Accord provides a framework for assessing the capital adequacy of a depository institution by risk weighting its assets and off-balance sheet exposures primarily based on credit risk. The Basel Committee on Banking Supervision consists of representatives of the supervisory authorities and central banks from the Group of Ten countries (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom, United States) and Luxembourg. See 54 FR 4168 (January 27, 1989) (OCC), 54 FR 4186 (January 27, 1989) (Board), 54 FR 11509 (March 21, 1989) (FDIC). VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 provides an important source of liquidity to the securities markets. In a typical securities borrowing transaction, a party (for example, a banking organization) borrows securities from a securities lender and posts collateral in the form of cash or highly marketable securities with the securities lender (or an agent acting on behalf of the securities lender) in an amount that fully covers the value of the securities borrowed plus an additional margin, usually ranging from two to five percent. In accordance with U.S. generally accepted accounting principles (GAAP), cash collateral posted with the securities lender is treated as a receivable on the books of the securities borrower (that is, it is treated as a cash loan from the securities borrower to the securities lender). Under the 1989 rules, the securities borrower is required to hold capital against the full amount of this receivable—that is, the amount of the collateral posted. In contrast, under the 1989 rules, where a securities borrower posts collateral in the form of securities and those securities continue to be carried on the borrower’s books, it does not incur a capital charge on the posting of the securities as collateral because under GAAP no receivable from the counterparty is booked on the balance sheet. II. Interim Final Rule In December 2000, the Agencies issued the interim rule with request for comment addressing the risk-based capital treatment of securities borrowing transactions where the borrower posts cash collateral.2 In developing the interim rule, the Agencies recognized that securities borrowing is a longestablished financial activity that historically has resulted in an exceedingly low level of losses. Accordingly, the application of a standard 100 percent risk weight to the full amount of the cash collateral posted to support such borrowings resulted in a capital charge that was excessively high, not only in light of the risk involved in the transactions, but also in comparison to the capital required by other U.S. and non-U.S. regulators of financial firms for the same transactions. The Agencies also noted that, under the 1989 rules, a banking organization incurred no capital charge when it borrowed securities and posted securities to collateralize the borrowing, even though the organization was at risk 2 See 65 FR 75856 (December 5, 2000), 12 CFR part 3, appendix B (OCC), 12 CFR part 208, appendix A, 12 CFR part 225, appendix A (Board), 12 CFR part 325, appendix C (FDIC). PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 8933 for the amount by which the collateral posted exceeded the value of the securities borrowed. As a result, securities borrowing transactions in which cash collateral was used were penalized relative to those where securities were used as collateral. To address the case where securities borrowing transactions are collateralized by cash, the Agencies issued the interim rule with a request for comment that would better reflect the low risk of such transactions. The interim rule applied only to banking organizations that had adopted the market risk rule because only banking organizations with significant trading activity tend to engage in securities borrowing in any volume. Banking organizations that had not adopted the market risk rule continued to be subject to the risk-based capital treatment set forth in the 1989 rules for all their securities borrowing transactions. Under the interim rule, banking organizations that have adopted the market risk rule for assessing capital adequacy for trading positions could exclude from risk-weighted assets receivables arising from the posting of cash collateral associated with securities borrowing transactions to the extent such receivables were collateralized by the market value of the securities borrowed, subject to all of the following conditions: 1. The transaction is based on securities includable in the trading book that are liquid and readily marketable; 2. The transaction is marked to market daily; 3. The transaction is subject to daily margin maintenance requirements; and 4. The transaction is a securities contract under section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions under sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401–4407), or the Board’s Regulation EE (12 CFR Part 231). Under this treatment, the amount of the receivable created in connection with the posting of cash collateral in a securities borrowing transaction that is excluded from the securities borrower’s adjusted risk-weighted assets is limited to the portion that is collateralized by the market value of the securities borrowed. The uncollateralized portion, which equals the difference between the amount of cash collateral that the securities borrower posts in support of the borrowing and the current market E:\FR\FM\22FER1.SGM 22FER1 8934 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations cprice-sewell on PROD1PC66 with RULES value of the securities borrowed, is assigned to the risk weight appropriate to the securities lender. The interim rule did not change the risk-based capital treatment for the posting of securities collateral, as opposed to cash collateral. However, the Agencies indicated that pending revisions to the Basel Accord could require a charge for such borrowing transactions and, accordingly, the U.S. risk-based capital treatment could change in the future. Comments Received The Agencies received comment letters from eight respondents. The commenters uniformly supported the interim rule. With regard to the issue of whether the interim rule should be limited to only those banking organizations that have implemented the market risk rules, the three commenters who addressed this issue expressed support for the extension of the interim rule to all banking organizations. On the issue of whether the interim rule should be amended to impose a capital charge on securitiescollateralized borrowing transactions, the Agencies received five comments. Views on this issue were mixed as three commenters did not support a capital charge, while two expressed mild support. Another commenter suggested eliminating the requirement that the transaction be a securities contract under the Bankruptcy Code, a qualified financial contract under the Federal Deposit Insurance Act (FDIA), or a netting contract under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) or the Board’s Regulation EE. The commenter suggested that a banking organization should be permitted to exclude securities borrowing receivables for risk-based capital purposes as long as the pledge of the borrowed securities is legally enforceable in the event the counterparty failed. On November 17, 2005, the Federal Reserve Board hosted a meeting for all institutions subject to the market risk rule to discuss finalizing the interim rule. The meeting, which representatives of the OCC and the FDIC also attended, allowed all parties subject to the interim rule to discuss their positions with respect to how to finalize the interim rule on securities borrowing. The Agencies made clear that they were not seeking a group opinion or consensus, but rather seeking advice from the participants on an individual basis to better understand some of the issues. Most meeting participants expressed the view that it was important to finalize the interim rule in a way that VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 grants capital relief to securities borrowing transactions in line with the spirit of the interim rule. At the meeting, various banking organizations noted that while the first three criteria of the interim rule were appropriate for securities borrowing transactions to qualify for the capital treatment under the interim rule, the fourth criterion presented challenges. Various banking organizations also indicated that a strict reading of the fourth criterion would prevent transactions with counterparties that are not subject to the U.S. Bankruptcy Code, the FDIA, or FDICIA from qualifying for that treatment. In particular, transactions with non-U.S. counterparties may not meet the interim rule’s fourth criterion. Uncertainty also exists with regard to transactions with counterparties that are subject to state insolvency regimes or, like pension funds, that are not subject to a statutory insolvency regime. Several participants stated that an important risk mitigant in securities borrowing transactions is that they typically are conducted on either an overnight or an open basis, which gives both counterparties the right to effectively close out at any time. This feature ensures that the banking organization has the ability to terminate the transactions early should the banking organization detect counterparty credit risk problems, effectively reducing counterparty credit risk to very low levels. Because an open or overnight transaction allows a banking organization to terminate promptly transactions with counterparties whose financial condition is deteriorating, events of default such as failure to post margin are very seldom encountered. Many institutions present at the meeting indicated that, in large part because of the ability to terminate transactions at will, defaults on securities borrowing transactions have been extremely rare, and defaults resulting in losses have been even rarer. Following this meeting, several banking organizations submitted detailed technical suggestions on how to amend the interim rule to deal with their concerns. III. Final Rule After consideration of the comments received, the Agencies are issuing a final rule (the final rule) identical to the interim rule with one exception. Specifically, the fourth criterion, which requires that a cash-collateralized securities borrowing transaction be a securities contract for purposes of the Bankruptcy Code, a qualified financial contract for purposes of the FDIA, or a PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 netting contract for purposes of FDICIA or Regulation EE, will be replaced with the following: 4.(A) The transaction is a securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions for the purposes of sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401–4407), or the Board’s Regulation EE (12 CFR Part 231); or (B) If the transaction does not meet the criteria set forth in paragraph 4. (A) of this section, then either: (i) The banking organization has conducted sufficient legal review to reach a well-founded conclusion that (1) the securities borrowing agreement executed in connection with the transaction provides the banking organization the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default, including in a bankruptcy, insolvency, or other similar proceeding of the counterparty and (2) under applicable law of the relevant jurisdiction, its rights under the agreement are legal, valid, binding, and enforceable and any exercise of rights under the agreement will not be stayed or avoided; or (ii) The transaction is either overnight or unconditionally cancelable at any time by the banking organization, and the banking organization has conducted sufficient legal review to reach a wellfounded conclusion that (1) the securities borrowing agreement executed in connection with the transaction provides the banking organization the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default and (2) under the law governing the agreement, its rights under the agreement are legal, valid, binding, and enforceable. The fourth criterion has been revised to broaden the types of securities borrowing transactions that qualify for the interim rule. Subpart (A) preserves the existing method of qualification. It is the responsibility of the banking organization to determine if the transaction meets the criteria of subpart (A). If the transaction does not meet the criteria under subpart (A), or if there is uncertainty about it, the banking organization can rely on the criteria of E:\FR\FM\22FER1.SGM 22FER1 cprice-sewell on PROD1PC66 with RULES Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations subpart (B) to apply the capital treatment set forth in this final rule. Subpart (B) extends the treatment set forth in the interim rule to transactions that are exempt from any automatic stay in bankruptcy, insolvency, or similar proceedings or that are conducted on a basis that is either overnight or that provides the banking organization the unconditional right to terminate that transaction at will. In this regard, the Agencies will not view a reasonably short notice period, typically no more than the standard settlement period associated with the securities borrowed, as detracting from the unconditionality of the banking organization’s termination rights. With regard to overnight transactions, the counterparty generally should have no expectation, either explicit or implicit, that the banking organization will automatically roll over the transaction. Under subpart (B), transactions may qualify only if the banking organization has conducted sufficient legal review to conclude that its rights under the agreement under which the transactions are executed is legal, valid, binding, and enforceable. No such review is required for transactions qualifying under subpart (A). For transactions executed under standard industry contracts, trade groups representing the financial services industry with established expertise often commission and maintain a library of current legal opinions with respect to the legal status, validity, binding effect, and enforceability of such contracts with various counterparties under the laws of a number of jurisdictions. While the Agencies do not discourage a banking organization from obtaining a specific legal opinion tailored to a particular transaction, a banking organization’s review of the legal opinions described above to determine the legal status, validity, binding effect, and enforceability of a particular contract with a specific counterparty, for example, generally would meet the requirement for sufficient legal review under subpart (B). The Agencies believe that the revisions to the fourth criterion set forth in the final rule resolve, in a manner that preserves safety and soundness, technical difficulties banking organizations may have had in meeting this criterion for a number of securities borrowing transactions. At this time, the Agencies have decided not to extend the final rule beyond those banking organizations subject to the market risk rules. In general, securities borrowings are used to support trading activities and, thus, typically only banking organizations VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 subject to the market risk rules could realize a more than de minimis benefit from the capital treatment set out in this final rule. With regard to the issue of assessing a capital charge on securitiescollateralized securities borrowing transactions, the Agencies believe that while imposing such a charge would provide for a more consistent risk-based treatment of securities borrowing transactions in general, the enhanced consistency would impose additional burden on the affected banking organization with only a minimal increase in risk-based capital requirements. Accordingly, the Agencies will take no action on this issue at this time. The Agencies note that the treatment set forth in the final rule for securities borrowing differs from, and could result in lower capital charges than, the treatment set forth in the Basel II framework. The U.S. implementation of that framework could result in a capital treatment that differs significantly from that set forth in the final rule. Effective Date This final rule is effective as of February 22, 2006. Pursuant to 5 U.S.C. 553, each of the Agencies may issue a rule without delaying its effectiveness if the agency finds good cause for the immediate effective date. For the following reasons, the Agencies find good cause to issue this rule without a delayed effective date. First, in all respects, except one, the final rule is identical to the interim final rule that has been in effect since 2000. Thus, banking institutions are already subject to similar requirements. Second, the new provision in the final rule broadens the types of securities transactions that qualify for the riskbased capital treatment provided in the interim rule. The final rule thus relieves a restriction on U.S. banking organizations and fosters consistency among international institutions consistent with safety and soundness. Elimination of the costs and burdens associated with the restriction that is being removed warrants making this rule effective without a delayed effective date. Subject to certain exceptions, 12 U.S.C. 4802(b)(1) provides that new regulations and amendments to regulations prescribed by a Federal banking agency that impose additional reporting, disclosure, or other new requirements on an insured depository institution must take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form. Like the interim rule, the final rule PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 8935 imposes no additional reporting, disclosure, or other new requirements on insured depository institutions. Instead, it relieves a restriction. For this reason, section 4802(b)(1) does not apply to this rulemaking. Alternatively, section 4802(b)(1)(A) provides that the Agencies may, upon finding good cause to do so, determine that a regulation should become effective without a delayed effective date. As noted in the previous paragraph, the Agencies find good cause to issue this rule without a delayed effective date. Regulatory Flexibility Act Analysis Pursuant to section 605(b) of the Regulatory Flexibility Act, the Agencies have determined that this final rule would not have a significant impact on a substantial number of small entities in accord with the spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The final rule is only applicable to banking organizations subject to the market risk rules, which typically apply to large banking organizations with significant trading operations. Therefore, the Agencies do not believe this final rule will likely have a significant impact on a substantial number of small entities. Moreover, the overall impact of this final rule is to reduce regulatory burden. Accordingly, a regulatory flexibility analysis is not required. Paperwork Reduction Act The Agencies have determined that this final rule does not involve a collection of information pursuant to the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.). OCC Executive Order 12866 This rule will apply only to the small number of banks that are subject to the market risk rules. For those banks, the rule more accurately aligns the riskbased capital charge with the low risk of securities borrowing transactions, illustrated by a long-established history of exceedingly low levels of losses. Also, the rule will make the capital treatment comparable to that of other U.S. and non-U.S. regulators of financial firms for the same transactions. The OCC has determined that this joint final rule is not a significant regulatory action under Executive Order 12866. OCC Unfunded Mandates Reform Act of 1995 Determinations Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 104–4 (Unfunded Mandates Act) requires that an agency prepare a budgetary impact statement before E:\FR\FM\22FER1.SGM 22FER1 8936 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations 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 or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. As discussed in the preamble, this final rule is limited to banks subject to the market risk rules and to securities borrowing transactions collateralized with cash. The OCC, therefore, has determined that the final rule will not result in expenditures by State, local, or tribal governments, or by the private sector of $100 million or more. Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered. OCC Executive Order 13132 The OCC has determined that this rule does not have any Federalism implications, as required by Executive Order 13132, because it would not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. List of Subjects 12 CFR Part 3 Administrative practice and procedure, Capital, National banks, Reporting and recordkeeping requirements, Risk. 12 CFR Part 208 Accounting, Agriculture, Banks, banking, Confidential business information, Crime, Currency, Federal Reserve System, Mortgages, Reporting and recordkeeping requirements, Securities. 12 CFR Part 225 Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities. cprice-sewell on PROD1PC66 with RULES 12 CFR Part 325 Administrative practice and procedure, Bank deposit insurance, Banks, banking, Capital adequacy, Reporting and recordkeeping requirements, Savings associations, State non-member banks. VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 Department of the Treasury Office of the Comptroller of the Currency 12 CFR Chapter 1 Authority and Issuance The interim final rule amending 12 CFR part 3 Appendices A and B, published at 65 FR 75856 (December 5, 2000), is adopted as final, with the following changes: I PART 3—MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES 1. The authority citation for part 3 continues to read as follows: I Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907 and 3909. 2. In appendix B to part 3, in section 3, revise paragraph (a)(1) to read as follows: I Appendix B to Part 3—Risk-Based Capital Guidelines; Market Risk Adjustment Section 3. Adjustments to the Risk-Based Capital Ratio Calculations. (a) * * * (1) Adjusted risk-weighted assets. (i) Covered positions. Calculate adjusted riskweighted assets, which equal risk-weighted assets (as determined in accordance with appendix A of this part), excluding the riskweighted amount of all covered positions (except foreign exchange positions outside the trading account and over-the-counter derivatives positions).7 (ii) Securities borrowing transactions. In calculating adjusted risk-weighted assets, a bank also may exclude a receivable that results from the bank’s posting of cash collateral in a securities borrowing transaction to the extent that the receivable is collateralized by the market value of the borrowed securities and subject to the following conditions: (A) The borrowed securities must be includable in the trading account and must be liquid and readily marketable; (B) The borrowed securities must be marked to market daily; (C) The receivable must be subject to a daily margining requirement; and (D) (1) The transaction is a securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions for the purposes of sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401– 4407), or the Board’s Regulation EE (12 CFR Part 231); or 7 Foreign exchange position outside the trading account and all over-the-counter derivative positions, whether or not in the trading account, must be included in adjusted risk-weighted assets as determined in appendix A of this part 3. PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 (2) If the transaction does not meet the criteria set forth in paragraph (a)(1)(ii)(D)(1) of this section, then either: (i) The bank has conducted sufficient legal review to reach a well-founded conclusion that: (A) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default, including in a bankruptcy, insolvency, or other similar proceeding of the counterparty; and (B) Under applicable law of the relevant jurisdiction, its rights under the agreement are legal, valid, binding, and enforceable and any exercise of rights under the agreement will not be stayed or avoided; or (ii) The transaction is either overnight or unconditionally cancelable at any time by the bank, and the bank has conducted sufficient legal review to reach a well-founded conclusion that: (A) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default; and (B) Under the law governing the agreement, its rights under the agreement are legal, valid, binding, and enforceable. * * * * * Federal Reserve System 12 CFR Chapter II Authority and Issuance For the reasons set forth in the joint preamble, part 208 of chapter II of title 12 of the Code of Federal Regulations is amended as set forth below: I PART 208—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. The authority citation for part 208 continues to read as follows: I Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321–338a, 371d, 461, 481–486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 1828(o), 1831, 1831o, 1831–1, 1831r– 1, 1835a, 1882, 2901–2907, 3105, 3310, 3331–3351, and 3906–3909; 15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o–4(c)(5), 78q, 78q–1, and 78w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128. 2. In appendix E to part 208, under section 3, paragraph (a)(1) is revised to read as follows: I Appendix E to Part 208—Capital Adequacy Guidelines for State Member Banks; Market Risk Measure * * * * * Section 3. Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * E:\FR\FM\22FER1.SGM 22FER1 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations cprice-sewell on PROD1PC66 with RULES (1) Adjusted risk-weighted assets. Calculate adjusted risk-weighted assets, which equals risk-weighted assets (as determined in accordance with appendix A of this part) excluding the risk-weighted amounts of all covered positions (except foreign-exchange positions outside the trading account and over-the-counter derivative positions) 7 and receivables arising from the posting of cash collateral that is associated with securities borrowing transactions to the extent the receivables are collateralized by the market value of the borrowed securities, provided that the following conditions are met: (i) The transaction is based on securities includable in the trading book that are liquid and readily marketable, (ii) The transaction is marked to market daily, (iii) The transaction is subject to daily margin maintenance requirements, and (iv)(A) The transaction is a securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions for the purposes of sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401– 4407), or the Board’s Regulation EE (12 CFR Part 231); or (B) If the transaction does not meet the criteria set forth in paragraph (iv)(A) of this section, then either: (1) The bank has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default, including in a bankruptcy, insolvency, or other similar proceeding of the counterparty; and (ii) Under applicable law of the relevant jurisdiction, its rights under the agreement are legal, valid, binding, and enforceable and any exercise of rights under the agreement will not be stayed or avoided; or (2) The transaction is either overnight or unconditionally cancelable at any time by the bank, and the bank has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default; and (ii) Under the law governing the agreement, its rights under the agreement are legal, valid, binding, and enforceable. * * * * * 7 Foreign-exchange positions outside the trading account and all over-the-counter derivative positions, whether or not in the trading account, must be included in adjusted risk-weighted assets as determined in appendix A of this part. VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. The authority citation for part 225 continues to read as follows: I Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p–1, 1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331–3351, 3907, and 3909; 15 U.S.C. 6801 and 6805. 2. In appendix E to part 225, under section 3, paragraph (a)(1) is revised to read as follows: I Appendix E to Part 225—Capital Adequacy Guidelines for Bank Holding Companies; Market Risk Measure * * * * * Section 3. Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * (1) Adjusted risk-weighted assets. Calculate adjusted risk-weighted assets, which equals risk-weighted assets (as determined in accordance with appendix A of this part) excluding the risk-weighted amounts of all covered positions (except foreign-exchange positions outside the trading account and over-the-counter derivative positions) 7 and receivables arising from the posting of cash collateral that is associated with securities borrowing transactions to the extent the receivables are collateralized by the market value of the borrowed securities, provided that the following conditions are met: (i) The transaction is based on securities includable in the trading book that are liquid and readily marketable, (ii) The transaction is marked to market daily, (iii) The transaction is subject to daily margin maintenance requirements, and (iv)(A) The transaction is a securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions for the purposes of sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401– 4407), or the Board’s Regulation EE (12 CFR Part 231); or (B) If the transaction does not meet the criteria set forth in paragraph (iv)(A) of this section, then either: (1) The banking organization has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the banking organization the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default, including in a bankruptcy, insolvency, or other similar proceeding of the counterparty; and (ii) Under applicable law of the relevant jurisdiction, its rights under the agreement are legal, valid, binding, and enforceable and PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 8937 any exercise of rights under the agreement will not be stayed or avoided; or (2) The transaction is either overnight or unconditionally cancelable at any time by the banking organization, and the banking organization has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the banking organization the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default; and (ii) Under the law governing the agreement, its rights under the agreement are legal, valid, binding, and enforceable. * * * * * Federal Deposit Insurance Corporation 12 CFR Chapter III Authority and Issuance For the reasons set forth in the joint preamble, part 325 of chapter III of title 12 of the Code of Federal Regulations is amended as follows: I PART 325—CAPITAL MAINTENANCE 1. The authority citation for part 325 continues to read as follows: I 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; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102– 242, 105 Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note). 2. In appendix C to part 325, under section 3, paragraph (a)(1) is revised to read as follows: I Appendix C to Part 325—Risk-Based Capital for State Non-Member Banks: Market Risk * * * * * Section 3. Adjustments to the Risk-Based Capital Ratio Calculations (a) * * * (1) Adjusted risk-weighted assets. Calculate adjusted risk-weighted assets, which equals risk-weighted assets (as determined in accordance with appendix A of this part), excluding the risk-weighted amounts of all covered positions (except foreign exchange positions outside the trading account and over-the-counter derivative positions) 7 and receivables arising from the posting of cash collateral that is associated with securities borrowing transactions to the extent the receivables are collateralized by the market value of the borrowed securities, provided that the following conditions are met: (i) The transaction is based on securities includable in the trading book that are liquid and readily marketable, (ii) The transaction is marked to market daily, (iii) The transaction is subject to daily margin maintenance requirements, and E:\FR\FM\22FER1.SGM 22FER1 8938 Federal Register / Vol. 71, No. 35 / Wednesday, February 22, 2006 / Rules and Regulations (iv)(A) The transaction is a securities contract for the purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract for the purposes of section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between or among financial institutions for the purposes of sections 401–407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401– 4407), or the Board’s Regulation EE (12 CFR Part 231); or (B) If the transaction does not meet the criteria set forth in paragraph (iv)(A) of this section, then either: (1) The bank has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default, including in a bankruptcy, insolvency, or other similar proceeding of the counterparty; and (ii) Under applicable law of the relevant jurisdiction, its rights under the agreement are legal, valid, binding, and enforceable and any exercise of rights under the agreement will not be stayed or avoided; or (2) The transaction is either overnight or unconditionally cancelable at any time by the bank, and the bank has conducted sufficient legal review to reach a well-founded conclusion that: (i) The securities borrowing agreement executed in connection with the transaction provides the bank the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of counterparty default; and (ii) Under the law governing the agreement, its rights under the agreement are legal, valid, binding, and enforceable. cprice-sewell on PROD1PC66 with RULES * * * * * Dated: February 9, 2006. John C. Dugan, Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System, February 8, 2006. Jennifer J. Johnson Secretary of the Board Dated at Washington, DC, this 10th day of February, 2006. By order of the Board of Directors. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. [FR Doc. 06–1533 Filed 2–21–06; 8:45 am] BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P FARM CREDIT ADMINISTRATION DEPARTMENT OF TRANSPORTATION 12 CFR Parts 600, 602, 603, 604, and 606 Federal Aviation Administration 14 CFR Part 71 RIN 3052–AB82 [Docket No. FAA–2005–23374; Airspace Docket No. 05–ACE–34] Organization and Functions; Releasing Information; Privacy Act Regulations; Farm Credit Administration Board Meetings; and Enforcement of Nondiscrimination on the Basis of Handicap in Programs or Activities Conducted by the Farm Credit Administration; Effective Date AGENCY: ACTION: Farm Credit Administration. Notice of effective date. SUMMARY: The Farm Credit Administration (FCA) published a final rule under parts 600, 602, 603, 604, and 606 on November 17, 2005 (70 FR 69644). This final rule amends our regulations on the FCA’s organization and functions to reflect the Agency’s organization, update the statutory citation for the Farm Credit Act, and identify those FCA employees responsible for various functions named in parts 602, 603, 604, and 606 to conform to organizational changes. In accordance with 12 U.S.C. 2252, the effective date of the final rule is 30 days from the date of publication in the Federal Register during which either or both Houses of Congress are in session. Based on the records of the sessions of Congress, the effective date of the regulation is February 15, 2006. Effective Date: The regulation amending 12 CFR parts 600, 602, 603, 604, and 606 published on November 17, 2005 (70 FR 69644) is effective February 15, 2006. DATES: FOR FURTHER INFORMATION CONTACT: Mark L Johansen, Senior Policy Analyst, Office of Regulatory Policy, Farm Credit Administration, McLean, VA 22102– 5090, (703) 883–4479, TTY (703) 883– 4434; or Jane Virga, Senior Counsel, Office of General Counsel, Farm Credit Administration, McLean, VA 22102– 5090, (703) 883–4020, TTY (703) 883– 4020. (12 U.S.C. 2252(a)(9) and (10)) Dated: February 15, 2006. Roland E. Smith, Secretary, Farm Credit Administration Board. [FR Doc. 06–1637 Filed 2–21–06; 8:45 am] BILLING CODE 6705–01–P VerDate Aug<31>2005 13:17 Feb 21, 2006 Jkt 208001 PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 Establishment of Class E5 Airspace; David City, NE Federal Aviation Administration (FAA), DOT. ACTION: Final rule. AGENCY: SUMMARY: This rule establishes a Class E surface area airspace area extending upward from 700 feet above the surface at David City, NE. The effect of this rule is to provide appropriate controlled Class E airspace for aircraft departing from and executing instrument approach procedures to, David City Municipal Airport, NE and to segregate aircraft using instrument approach procedures in instrument conditions from aircraft operating in visual conditions. DATES: Effective: 0901 UTC, April 13, 2006. FOR FURTHER INFORMATION CONTACT: Brenda Mumper, Air Traffic Division, Airspace Branch, ACE–520A, DOT Regional Headquarters Building, Federal Aviation Administration, 901 Locust, Kansas City, MO 64106; telephone: (816) 329–2524. SUPPLEMENTARY INFORMATION: History On Thursday, January 5, 2006, the FAA proposed to amend part 71 of the Federal Aviation Regulations (14 CFR part 71) to establish Class E airspace at David City, NE (71 FR 552). The proposal was to establish a Class E5 airspace area to bring David City, NE airspace into compliance with FAA directives. Interested parties were invited to participate in this rulemaking proceeding by submitting written comments on the proposal to the FAA. No comments objecting to the proposal were received. The Rule This notice amends part 71 of the Federal Aviation Regulations (14 CFR part 71) by establishing a Class E airspace area extending upward from 700 feet above the surface at David City Municipal Airport, NE. The establishment of a Very High Frequency (VHF) Omni-directional Range (VOR)/ Distance Measuring Equipment (DME) Instrument Approach Procedure (IAP) to Runway (RWY) 32 and Area Navigation (RNAV) Global Positioning System E:\FR\FM\22FER1.SGM 22FER1

Agencies

[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Rules and Regulations]
[Pages 8932-8938]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1533]


=======================================================================
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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 06-02]
RIN 1557-AC90

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulation H and Y; Docket No. R-1087]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC46


Risk-Based Capital Guidelines; Market Risk Measure; Securities 
Borrowing Transactions

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; and Federal Deposit Insurance 
Corporation.

ACTION: Final 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 final rule that amends their market risk rules to revise the 
risk-based capital treatment for cash collateral that is posted in 
connection with securities borrowing transactions. This final rule will 
make permanent, and expand the scope of, an interim final rule issued 
in 2000 (the interim rule) that reduced the capital requirement for 
certain cash-collateralized securities borrowing transactions of banks 
and bank holding companies (banking organizations) that have adopted 
the market risk rule. This action more appropriately aligns the capital 
requirements for these transactions with the risk involved and provides 
a capital treatment for U.S. banking organizations that is more in line 
with the capital treatment to which their domestic and foreign 
competitors are subject.

DATES: Effective: February 22, 2006.

FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert, 
Capital Policy (202) 874-6022, or Carl Kaminski, Attorney, Legislative 
and Regulatory Activities Division (202) 874-5090, Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

[[Page 8933]]

    Board: Norah Barger, Associate Director, Division of Banking 
Supervision and Regulation, (202) 452-2402, David Adkins, Supervisory 
Financial Analyst, Division of Banking Supervision and Regulation, 
(202) 452-5259, Juan C. Climent, Supervisory Financial Analyst, 
Division of Banking Supervision and Regulation, (202) 872-7526, or Mark 
Van Der Weide, Senior Counsel, Legal Division, (202) 452-2263. For the 
hearing impaired only, Telecommunication Device for the Deaf (TDD), 
(202) 263-4869.
    FDIC: Jason Cave, Associate Director, Division of Supervision and 
Consumer Protection, (202) 898-3548, John Feid, Senior Capital Markets 
Specialist, Division of Supervision and Consumer Protection, (202) 898-
8649, or Michael B. Phillips, Counsel, (202) 898-3581, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Neither the July 1988 agreement entitled ``International 
Convergence of Capital Measurement and Capital Standards'' (Basel 
Accord) nor the risk-based capital guidelines adopted by the Agencies 
in 1989 (the 1989 rules) specifically address securities borrowing 
transactions.\1\ At that time, the involvement of U.S. banking 
organizations in corporate debt and equity securities trading 
activities was limited. However, in recent years, U.S. banking 
organizations have been authorized to engage in, and have engaged in, 
trading activities to a significantly greater extent. Securities 
borrowing transactions serve an important function in the operation of 
securities markets. They are used in conjunction with short sales, 
securities fails (securities sold but not made available for delivery 
on the settlement date), and option and arbitrage positions. Securities 
are also borrowed in order to be pledged against public fund deposits. 
Securities borrowing enhances market efficiency and provides an 
important source of liquidity to the securities markets.
---------------------------------------------------------------------------

    \1\ The Basel Accord was developed by the Basel Committee on 
Banking Supervision and endorsed by the central bank governors of 
the Group of Ten (G-10) countries. The Basel Accord provides a 
framework for assessing the capital adequacy of a depository 
institution by risk weighting its assets and off-balance sheet 
exposures primarily based on credit risk. The Basel Committee on 
Banking Supervision consists of representatives of the supervisory 
authorities and central banks from the Group of Ten countries 
(Belgium, Canada, France, Germany, Italy, Japan, Netherlands, 
Sweden, Switzerland, United Kingdom, United States) and Luxembourg. 
See 54 FR 4168 (January 27, 1989) (OCC), 54 FR 4186 (January 27, 
1989) (Board), 54 FR 11509 (March 21, 1989) (FDIC).
---------------------------------------------------------------------------

    In a typical securities borrowing transaction, a party (for 
example, a banking organization) borrows securities from a securities 
lender and posts collateral in the form of cash or highly marketable 
securities with the securities lender (or an agent acting on behalf of 
the securities lender) in an amount that fully covers the value of the 
securities borrowed plus an additional margin, usually ranging from two 
to five percent. In accordance with U.S. generally accepted accounting 
principles (GAAP), cash collateral posted with the securities lender is 
treated as a receivable on the books of the securities borrower (that 
is, it is treated as a cash loan from the securities borrower to the 
securities lender). Under the 1989 rules, the securities borrower is 
required to hold capital against the full amount of this receivable--
that is, the amount of the collateral posted. In contrast, under the 
1989 rules, where a securities borrower posts collateral in the form of 
securities and those securities continue to be carried on the 
borrower's books, it does not incur a capital charge on the posting of 
the securities as collateral because under GAAP no receivable from the 
counterparty is booked on the balance sheet.

II. Interim Final Rule

    In December 2000, the Agencies issued the interim rule with request 
for comment addressing the risk-based capital treatment of securities 
borrowing transactions where the borrower posts cash collateral.\2\ In 
developing the interim rule, the Agencies recognized that securities 
borrowing is a long-established financial activity that historically 
has resulted in an exceedingly low level of losses. Accordingly, the 
application of a standard 100 percent risk weight to the full amount of 
the cash collateral posted to support such borrowings resulted in a 
capital charge that was excessively high, not only in light of the risk 
involved in the transactions, but also in comparison to the capital 
required by other U.S. and non-U.S. regulators of financial firms for 
the same transactions. The Agencies also noted that, under the 1989 
rules, a banking organization incurred no capital charge when it 
borrowed securities and posted securities to collateralize the 
borrowing, even though the organization was at risk for the amount by 
which the collateral posted exceeded the value of the securities 
borrowed. As a result, securities borrowing transactions in which cash 
collateral was used were penalized relative to those where securities 
were used as collateral.
---------------------------------------------------------------------------

    \2\ See 65 FR 75856 (December 5, 2000), 12 CFR part 3, appendix 
B (OCC), 12 CFR part 208, appendix A, 12 CFR part 225, appendix A 
(Board), 12 CFR part 325, appendix C (FDIC).
---------------------------------------------------------------------------

    To address the case where securities borrowing transactions are 
collateralized by cash, the Agencies issued the interim rule with a 
request for comment that would better reflect the low risk of such 
transactions. The interim rule applied only to banking organizations 
that had adopted the market risk rule because only banking 
organizations with significant trading activity tend to engage in 
securities borrowing in any volume. Banking organizations that had not 
adopted the market risk rule continued to be subject to the risk-based 
capital treatment set forth in the 1989 rules for all their securities 
borrowing transactions.
    Under the interim rule, banking organizations that have adopted the 
market risk rule for assessing capital adequacy for trading positions 
could exclude from risk-weighted assets receivables arising from the 
posting of cash collateral associated with securities borrowing 
transactions to the extent such receivables were collateralized by the 
market value of the securities borrowed, subject to all of the 
following conditions:
    1. The transaction is based on securities includable in the trading 
book that are liquid and readily marketable;
    2. The transaction is marked to market daily;
    3. The transaction is subject to daily margin maintenance 
requirements; and
    4. The transaction is a securities contract under section 555 of 
the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract 
under section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(e)(8)), or a netting contract between or among financial 
institutions under sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231).
    Under this treatment, the amount of the receivable created in 
connection with the posting of cash collateral in a securities 
borrowing transaction that is excluded from the securities borrower's 
adjusted risk-weighted assets is limited to the portion that is 
collateralized by the market value of the securities borrowed. The 
uncollateralized portion, which equals the difference between the 
amount of cash collateral that the securities borrower posts in support 
of the borrowing and the current market

[[Page 8934]]

value of the securities borrowed, is assigned to the risk weight 
appropriate to the securities lender.
    The interim rule did not change the risk-based capital treatment 
for the posting of securities collateral, as opposed to cash 
collateral. However, the Agencies indicated that pending revisions to 
the Basel Accord could require a charge for such borrowing transactions 
and, accordingly, the U.S. risk-based capital treatment could change in 
the future.

Comments Received

    The Agencies received comment letters from eight respondents. The 
commenters uniformly supported the interim rule. With regard to the 
issue of whether the interim rule should be limited to only those 
banking organizations that have implemented the market risk rules, the 
three commenters who addressed this issue expressed support for the 
extension of the interim rule to all banking organizations. On the 
issue of whether the interim rule should be amended to impose a capital 
charge on securities-collateralized borrowing transactions, the 
Agencies received five comments. Views on this issue were mixed as 
three commenters did not support a capital charge, while two expressed 
mild support. Another commenter suggested eliminating the requirement 
that the transaction be a securities contract under the Bankruptcy 
Code, a qualified financial contract under the Federal Deposit 
Insurance Act (FDIA), or a netting contract under the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (FDICIA) or the Board's 
Regulation EE. The commenter suggested that a banking organization 
should be permitted to exclude securities borrowing receivables for 
risk-based capital purposes as long as the pledge of the borrowed 
securities is legally enforceable in the event the counterparty failed.
    On November 17, 2005, the Federal Reserve Board hosted a meeting 
for all institutions subject to the market risk rule to discuss 
finalizing the interim rule. The meeting, which representatives of the 
OCC and the FDIC also attended, allowed all parties subject to the 
interim rule to discuss their positions with respect to how to finalize 
the interim rule on securities borrowing. The Agencies made clear that 
they were not seeking a group opinion or consensus, but rather seeking 
advice from the participants on an individual basis to better 
understand some of the issues. Most meeting participants expressed the 
view that it was important to finalize the interim rule in a way that 
grants capital relief to securities borrowing transactions in line with 
the spirit of the interim rule.
    At the meeting, various banking organizations noted that while the 
first three criteria of the interim rule were appropriate for 
securities borrowing transactions to qualify for the capital treatment 
under the interim rule, the fourth criterion presented challenges. 
Various banking organizations also indicated that a strict reading of 
the fourth criterion would prevent transactions with counterparties 
that are not subject to the U.S. Bankruptcy Code, the FDIA, or FDICIA 
from qualifying for that treatment. In particular, transactions with 
non-U.S. counterparties may not meet the interim rule's fourth 
criterion. Uncertainty also exists with regard to transactions with 
counterparties that are subject to state insolvency regimes or, like 
pension funds, that are not subject to a statutory insolvency regime.
    Several participants stated that an important risk mitigant in 
securities borrowing transactions is that they typically are conducted 
on either an overnight or an open basis, which gives both 
counterparties the right to effectively close out at any time. This 
feature ensures that the banking organization has the ability to 
terminate the transactions early should the banking organization detect 
counterparty credit risk problems, effectively reducing counterparty 
credit risk to very low levels. Because an open or overnight 
transaction allows a banking organization to terminate promptly 
transactions with counterparties whose financial condition is 
deteriorating, events of default such as failure to post margin are 
very seldom encountered. Many institutions present at the meeting 
indicated that, in large part because of the ability to terminate 
transactions at will, defaults on securities borrowing transactions 
have been extremely rare, and defaults resulting in losses have been 
even rarer. Following this meeting, several banking organizations 
submitted detailed technical suggestions on how to amend the interim 
rule to deal with their concerns.

III. Final Rule

    After consideration of the comments received, the Agencies are 
issuing a final rule (the final rule) identical to the interim rule 
with one exception. Specifically, the fourth criterion, which requires 
that a cash-collateralized securities borrowing transaction be a 
securities contract for purposes of the Bankruptcy Code, a qualified 
financial contract for purposes of the FDIA, or a netting contract for 
purposes of FDICIA or Regulation EE, will be replaced with the 
following:
    4.(A) The transaction is a securities contract for the purposes of 
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified 
financial contract for the purposes of section 11(e)(8) of the Federal 
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract 
between or among financial institutions for the purposes of sections 
401-407 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR Part 
231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph 4. (A) of this section, then either:
    (i) The banking organization has conducted sufficient legal review 
to reach a well-founded conclusion that (1) the securities borrowing 
agreement executed in connection with the transaction provides the 
banking organization the right to accelerate, terminate, and close-out 
on a net basis all transactions under the agreement and to liquidate or 
set off collateral promptly upon an event of counterparty default, 
including in a bankruptcy, insolvency, or other similar proceeding of 
the counterparty and (2) under applicable law of the relevant 
jurisdiction, its rights under the agreement are legal, valid, binding, 
and enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (ii) The transaction is either overnight or unconditionally 
cancelable at any time by the banking organization, and the banking 
organization has conducted sufficient legal review to reach a well-
founded conclusion that (1) the securities borrowing agreement executed 
in connection with the transaction provides the banking organization 
the right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set off collateral 
promptly upon an event of counterparty default and (2) under the law 
governing the agreement, its rights under the agreement are legal, 
valid, binding, and enforceable.
    The fourth criterion has been revised to broaden the types of 
securities borrowing transactions that qualify for the interim rule. 
Subpart (A) preserves the existing method of qualification. It is the 
responsibility of the banking organization to determine if the 
transaction meets the criteria of subpart (A). If the transaction does 
not meet the criteria under subpart (A), or if there is uncertainty 
about it, the banking organization can rely on the criteria of

[[Page 8935]]

subpart (B) to apply the capital treatment set forth in this final 
rule. Subpart (B) extends the treatment set forth in the interim rule 
to transactions that are exempt from any automatic stay in bankruptcy, 
insolvency, or similar proceedings or that are conducted on a basis 
that is either overnight or that provides the banking organization the 
unconditional right to terminate that transaction at will. In this 
regard, the Agencies will not view a reasonably short notice period, 
typically no more than the standard settlement period associated with 
the securities borrowed, as detracting from the unconditionality of the 
banking organization's termination rights. With regard to overnight 
transactions, the counterparty generally should have no expectation, 
either explicit or implicit, that the banking organization will 
automatically roll over the transaction.
    Under subpart (B), transactions may qualify only if the banking 
organization has conducted sufficient legal review to conclude that its 
rights under the agreement under which the transactions are executed is 
legal, valid, binding, and enforceable. No such review is required for 
transactions qualifying under subpart (A). For transactions executed 
under standard industry contracts, trade groups representing the 
financial services industry with established expertise often commission 
and maintain a library of current legal opinions with respect to the 
legal status, validity, binding effect, and enforceability of such 
contracts with various counterparties under the laws of a number of 
jurisdictions. While the Agencies do not discourage a banking 
organization from obtaining a specific legal opinion tailored to a 
particular transaction, a banking organization's review of the legal 
opinions described above to determine the legal status, validity, 
binding effect, and enforceability of a particular contract with a 
specific counterparty, for example, generally would meet the 
requirement for sufficient legal review under subpart (B).
    The Agencies believe that the revisions to the fourth criterion set 
forth in the final rule resolve, in a manner that preserves safety and 
soundness, technical difficulties banking organizations may have had in 
meeting this criterion for a number of securities borrowing 
transactions.
    At this time, the Agencies have decided not to extend the final 
rule beyond those banking organizations subject to the market risk 
rules. In general, securities borrowings are used to support trading 
activities and, thus, typically only banking organizations subject to 
the market risk rules could realize a more than de minimis benefit from 
the capital treatment set out in this final rule. With regard to the 
issue of assessing a capital charge on securities-collateralized 
securities borrowing transactions, the Agencies believe that while 
imposing such a charge would provide for a more consistent risk-based 
treatment of securities borrowing transactions in general, the enhanced 
consistency would impose additional burden on the affected banking 
organization with only a minimal increase in risk-based capital 
requirements. Accordingly, the Agencies will take no action on this 
issue at this time.
    The Agencies note that the treatment set forth in the final rule 
for securities borrowing differs from, and could result in lower 
capital charges than, the treatment set forth in the Basel II 
framework. The U.S. implementation of that framework could result in a 
capital treatment that differs significantly from that set forth in the 
final rule.

Effective Date

    This final rule is effective as of February 22, 2006. Pursuant to 5 
U.S.C. 553, each of the Agencies may issue a rule without delaying its 
effectiveness if the agency finds good cause for the immediate 
effective date.
    For the following reasons, the Agencies find good cause to issue 
this rule without a delayed effective date. First, in all respects, 
except one, the final rule is identical to the interim final rule that 
has been in effect since 2000. Thus, banking institutions are already 
subject to similar requirements. Second, the new provision in the final 
rule broadens the types of securities transactions that qualify for the 
risk-based capital treatment provided in the interim rule. The final 
rule thus relieves a restriction on U.S. banking organizations and 
fosters consistency among international institutions consistent with 
safety and soundness. Elimination of the costs and burdens associated 
with the restriction that is being removed warrants making this rule 
effective without a delayed effective date.
    Subject to certain exceptions, 12 U.S.C. 4802(b)(1) provides that 
new regulations and amendments to regulations prescribed by a Federal 
banking agency that impose additional reporting, disclosure, or other 
new requirements on an insured depository institution must take effect 
on the first day of a calendar quarter that begins on or after the date 
on which the regulations are published in final form. Like the interim 
rule, the final rule imposes no additional reporting, disclosure, or 
other new requirements on insured depository institutions. Instead, it 
relieves a restriction. For this reason, section 4802(b)(1) does not 
apply to this rulemaking. Alternatively, section 4802(b)(1)(A) provides 
that the Agencies may, upon finding good cause to do so, determine that 
a regulation should become effective without a delayed effective date. 
As noted in the previous paragraph, the Agencies find good cause to 
issue this rule without a delayed effective date.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Agencies have determined that this final rule would not have a 
significant impact on a substantial number of small entities in accord 
with the spirit and purposes of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.). The final rule is only applicable to banking 
organizations subject to the market risk rules, which typically apply 
to large banking organizations with significant trading operations. 
Therefore, the Agencies do not believe this final rule will likely have 
a significant impact on a substantial number of small entities. 
Moreover, the overall impact of this final rule is to reduce regulatory 
burden. Accordingly, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    The Agencies have determined that this final rule does not involve 
a collection of information pursuant to the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

OCC Executive Order 12866

    This rule will apply only to the small number of banks that are 
subject to the market risk rules. For those banks, the rule more 
accurately aligns the risk-based capital charge with the low risk of 
securities borrowing transactions, illustrated by a long-established 
history of exceedingly low levels of losses. Also, the rule will make 
the capital treatment comparable to that of other U.S. and non-U.S. 
regulators of financial firms for the same transactions. The OCC has 
determined that this joint final rule is not a significant regulatory 
action under Executive Order 12866.

OCC Unfunded Mandates Reform Act of 1995 Determinations

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before

[[Page 8936]]

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 or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. As discussed in the preamble, this final rule is limited to banks 
subject to the market risk rules and to securities borrowing 
transactions collateralized with cash. The OCC, therefore, has 
determined that the final rule will not result in expenditures by 
State, local, or tribal governments, or by the private sector of $100 
million or more. Accordingly, the OCC has not prepared a budgetary 
impact statement or specifically addressed the regulatory alternatives 
considered.

OCC Executive Order 13132

    The OCC has determined that this rule does not have any Federalism 
implications, as required by Executive Order 13132, because it would 
not have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

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

12 CFR Part 325

    Administrative practice and procedure, Bank deposit insurance, 
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 1

Authority and Issuance

0
The interim final rule amending 12 CFR part 3 Appendices A and B, 
published at 65 FR 75856 (December 5, 2000), is adopted as final, with 
the following changes:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

0
1. The authority citation for part 3 continues to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907 and 3909.


0
2. In appendix B to part 3, in section 3, revise paragraph (a)(1) to 
read as follows:

Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk 
Adjustment

Section 3. Adjustments to the Risk-Based Capital Ratio 
Calculations.

    (a) * * *
    (1) Adjusted risk-weighted assets. (i) Covered positions. 
Calculate adjusted risk-weighted assets, which equal risk-weighted 
assets (as determined in accordance with appendix A of this part), 
excluding the risk-weighted amount of all covered positions (except 
foreign exchange positions outside the trading account and over-the-
counter derivatives positions).\7\
---------------------------------------------------------------------------

    \7\ Foreign exchange position outside the trading account and 
all over-the-counter derivative positions, whether or not in the 
trading account, must be included in adjusted risk-weighted assets 
as determined in appendix A of this part 3.
---------------------------------------------------------------------------

    (ii) Securities borrowing transactions. In calculating adjusted 
risk-weighted assets, a bank also may exclude a receivable that 
results from the bank's posting of cash collateral in a securities 
borrowing transaction to the extent that the receivable is 
collateralized by the market value of the borrowed securities and 
subject to the following conditions:
    (A) The borrowed securities must be includable in the trading 
account and must be liquid and readily marketable;
    (B) The borrowed securities must be marked to market daily;
    (C) The receivable must be subject to a daily margining 
requirement; and
    (D) (1) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (2) If the transaction does not meet the criteria set forth in 
paragraph (a)(1)(ii)(D)(1) of this section, then either:
    (i) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (A) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (B) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (ii) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (A) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (B) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons set forth in the joint preamble, part 208 of chapter II 
of title 12 of the Code of Federal Regulations is amended as set forth 
below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
1. The authority citation for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 
1828(o), 1831, 1831o, 1831-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w, 6801, and 6805; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


0
2. In appendix E to part 208, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
Banks; Market Risk Measure

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *

[[Page 8937]]

    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part) excluding the risk-weighted 
amounts of all covered positions (except foreign-exchange positions 
outside the trading account and over-the-counter derivative 
positions) \7\ and receivables arising from the posting of cash 
collateral that is associated with securities borrowing transactions 
to the extent the receivables are collateralized by the market value 
of the borrowed securities, provided that the following conditions 
are met:
---------------------------------------------------------------------------

    \7\ Foreign-exchange positions outside the trading account and 
all over-the-counter derivative positions, whether or not in the 
trading account, must be included in adjusted risk-weighted assets 
as determined in appendix A of this part.
---------------------------------------------------------------------------

    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and
    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
1. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909; 15 U.S.C. 6801 and 6805.


0
2. In appendix E to part 225, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies; Market Risk Measure

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *
    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part) excluding the risk-weighted 
amounts of all covered positions (except foreign-exchange positions 
outside the trading account and over-the-counter derivative 
positions) \7\ and receivables arising from the posting of cash 
collateral that is associated with securities borrowing transactions 
to the extent the receivables are collateralized by the market value 
of the borrowed securities, provided that the following conditions 
are met:
    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and
    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The banking organization has conducted sufficient legal 
review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the banking organization the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the banking organization, and the banking 
organization has conducted sufficient legal review to reach a well-
founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the banking organization the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

0
For the reasons set forth in the joint preamble, part 325 of chapter 
III of title 12 of the Code of Federal Regulations is amended as 
follows:

PART 325--CAPITAL MAINTENANCE

0
1. The authority citation for part 325 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; Pub. L. 102-233, 105 Stat. 
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 
2236, 2355, 2386 (12 U.S.C. 1828 note).


0
2. In appendix C to part 325, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix C to Part 325--Risk-Based Capital for State Non-Member Banks: 
Market Risk

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *
    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part), excluding the risk-
weighted amounts of all covered positions (except foreign exchange 
positions outside the trading account and over-the-counter 
derivative positions) \7\ and receivables arising from the posting 
of cash collateral that is associated with securities borrowing 
transactions to the extent the receivables are collateralized by the 
market value of the borrowed securities, provided that the following 
conditions are met:
    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and

[[Page 8938]]

    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

    Dated: February 9, 2006.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, February 8, 2006.
Jennifer J. Johnson
Secretary of the Board
    Dated at Washington, DC, this 10th day of February, 2006.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 06-1533 Filed 2-21-06; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P