Guidance on Due Diligence Requirements in Determining Whether Investment Securities Are Eligible for Investment, 73777-73780 [2011-30420]
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Federal Register / Vol. 76, No. 229 / Tuesday, November 29, 2011 / Notices
Service Zip Code 36330 and includes no
stations.
WCR states that, based on information
in WCR’s possession, the line does not
contain Federally granted rights-of-way.
Any documentation in WCR’s
possession will be made available
promptly to those requesting it.
The interests of railroad employees
will be protected by the conditions set
forth in Oregon Short Line Railroad—
Abandonment Portion Goshen Branch
Between Firth & Ammon, In Bingham &
Bonneville Counties, Idaho, 360 I.C.C.
91 (1979).
By issuance of this notice, the Board
is instituting an exemption proceeding
pursuant to 49 U.S.C. 10502(b). A final
decision will be issued by February 27,
2012.
Any offer of financial assistance
(OFA) under 49 CFR 1152.27(b)(2) will
be due no later than 10 days after
service of a decision granting the
petition for exemption. Each OFA must
be accompanied by a $1,500 filing fee.
See 49 CFR 1002.2(f)(25).
All interested persons should be
aware that, following abandonment of
rail service and salvage of the line, the
line may be suitable for other public
use, including interim trail use. Any
request for a public use condition under
49 CFR 1152.28 or for trail use/rail
banking under 49 CFR 1152.29 will be
due no later than December 19, 2011.
Each trail request must be accompanied
by a $250 filing fee. See 49 CFR
1002.2(f)(27).
All filings in response to this notice
must refer to Docket No. AB 1077X and
must be sent to: (1) Surface
Transportation Board, 395 E Street SW.,
Washington, DC 20423–0001; and (2)
Melanie B. Yasbin, 600 Baltimore
Avenue, Suite 301, Towson, MD 21204.
Replies to the petition are due on or
before December 19, 2011.
Persons seeking further information
concerning abandonment procedures
may contact the Board’s Office of Public
Assistance, Governmental Affairs and
Compliance at (202) 245–0238 or refer
to the full abandonment regulations at
49 CFR pt. 1152. Questions concerning
environmental issues may be directed to
the Board’s Office of Environmental
Analysis (OEA) at (202) 245–0305.
Assistance for the hearing impaired is
available through the Federal
Information Relay Service (FIRS) at 1–
(800) 877–8339.
An environmental assessment (EA) (or
environmental impact statement (EIS), if
necessary) prepared by OEA will be
served upon all parties of record and
upon any agencies or other persons who
commented during its preparation.
Other interested persons may contact
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OEA to obtain a copy of the EA (or EIS).
EAs in these abandonment proceedings
normally will be made available within
60 days of the filing of the petition. The
deadline for submission of comments on
the EA generally will be within 30 days
of its service.
Board decisions and notices are
available on our Web site at https://
www.stb.dot.gov.
Decided: November 17, 2011.
By the Board.
Rachel D. Campbell,
Director, Office of Proceedings.
Raina S. White,
Clearance Clerk.
[FR Doc. 2011–30295 Filed 11–28–11; 8:45 am]
BILLING CODE 4915–01–P
DEPARTMENT OF THE TREASURY
73777
submit a Supplemental Report each
quarter. The Supplemental Report
serves two purposes. First, the Quarterly
Supplemental Report is used to
determine the bank’s small business
lending baseline. Second, every quarter
thereafter, the bank files a Supplemental
Report quarterly so that Treasury can
assess the change in the small business
lending for the previous quarter. That
change from the historical baseline is
used to set the dividend rate for the next
quarter.
Affected Public: Banks and lending
institutions that were approved by
Treasury to participate in the Small
Business Lending Fund.
Estimated Total Annual Burden
Hours: 5,600.
Dawn D. Wolfgang,
Treasury PRA Clearance Officer.
[FR Doc. 2011–30718 Filed 11–28–11; 8:45 am]
Submission for OMB Review;
Comment Request
BILLING CODE 4810–25–P
November 23, 2011.
DEPARTMENT OF THE TREASURY
The Department of the Treasury will
submit the following information
collection request to the Office of
Management and Budget (OMB) for
review and clearance in accordance
with the Paperwork Reduction Act of
1995, Public Law 104–13, on or after the
date of publication of this notice.
DATES: Comments should be received on
or before December 29, 2011 to be
assured of consideration.
ADDRESSES: Send comments regarding
the burden estimate, or any other aspect
of the information collection, including
suggestion for reducing the burden, to
(1) Office of Information and Regulatory
Affairs, Office of Management and
Budget, Attention: Desk Officer for
Treasury, New Executive Office
Building, Room 10235, Washington, DC
20503, or email at
OIRA_Submission@OMB.EOP.GOV and
(2) Treasury PRA Clearance Officer,
1750 Pennsylvania Ave., NW., Suite
11020, Washington, DC 20220, or online at https://www.PRAComment.gov.
FOR FURTHER INFORMATION CONTACT:
Copies of the submission(s) may be
obtained by calling (202) 927–5331,
email at PRA@treasury.gov, or the entire
information collection request may be
found at https://www.reginfo.gov.
Office of the Comptroller of the
Currency
Small Business Lending Fund (SBLF)
OMB Number: 1505–0228.
Type of Review: Revision a currently
approved collection.
Title: Requirement to report quarterly
data on Small Business Lending.
Abstract: Once accepted into the
SBLF program, a bank is required to
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[Docket No. OCC–2011–0022]
RIN 1557–AD36
Guidance on Due Diligence
Requirements in Determining Whether
Investment Securities Are Eligible for
Investment
Office of the Comptroller of the
Currency, Treasury (OCC).
ACTION: Proposed guidance with request
for comment.
AGENCY:
The Office of the Comptroller
of the Currency (OCC) is proposing
guidance to assist national banks and
Federal savings associations in meeting
due diligence requirements in assessing
credit risk for portfolio investments.
DATES: Comments must be received
December 29, 2011.
ADDRESSES: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or email, if
possible. Please use the title ‘‘Guidance
on Due Diligence Requirements in
Determining Whether Investment
Securities Are Eligible for Investment’’
to facilitate the organization and review
of the comments. You may submit
comments by any of the following
methods:
• Email:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street SW., Mail
Stop 2–3, Washington, DC 20219.
SUMMARY:
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73778
Federal Register / Vol. 76, No. 229 / Tuesday, November 29, 2011 / Notices
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E Street
SW., Mail Stop 2–3, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
Number OCC–2011–0022’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
information, email addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rulemaking by any of the
following methods:
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street SW.,
Washington, DC. For security reasons,
the OCC requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 874–4700.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and submit to security
screening in order to inspect and
photocopy comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
FOR FURTHER INFORMATION CONTACT:
Kerri Corn, Director for Market Risk,
Credit and Market Risk Division, (202)
874–4660; or Carl Kaminski, Senior
Attorney, or Kevin Korzeniewski,
Attorney, Legislative and Regulatory
Activities Division, (202) 874–5090; or
Eugene H. Cantor, Counsel, Securities
and Corporate Practices Division, (202)
874–5202, Office of the Comptroller of
the Currency, 250 E Street SW.,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION: Section
939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act 1
requires each Federal agency, within
one year of enactment, to review: (1)
Any regulations that require the use of
an assessment of the creditworthiness of
a security or money market instrument,
and (2) any references to or
requirements in those regulations
regarding credit ratings. Section 939A
then requires the Federal agencies to
1 Public Law 111–203, Section 939A (July 21,
2010) (Dodd-Frank Act).
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modify the regulations identified during
the review to substitute any references
to or requirements of reliance on credit
ratings with such standards of
creditworthiness that each agency
determines to be appropriate. The
statute provides that the agencies shall
seek to establish, to the extent feasible,
uniform standards of creditworthiness,
taking into account the entities the
agencies regulate and the purposes for
which those entities would rely on such
standards.
The Office of the Comptroller of the
Currency (OCC) is issuing a notice of
proposed rulemaking (NPRM),
published on the same date as this
proposed guidance. The NPRM
proposes to remove references to credit
ratings in the OCC’s non-capital
regulations. In particular, the OCC
proposes to amend the definition of
‘‘investment grade’’ in 12 CFR part 1 to
no longer reference credit ratings.
Instead, ‘‘investment grade’’ securities
would be those where the issuer has an
adequate capacity to meet the financial
commitments under the security for the
projected life of the investment. An
issuer has an adequate capacity to meet
financial commitments if the risk of
default by the obligor is low and the full
and timely repayment of principal and
interest is expected. Generally,
securities with good to very strong
credit quality will meet this standard.
National banks will have to meet this
new standard before purchasing
investment securities.
OCC also is proposing to define the
term ‘‘investment grade,’’ for Federal
savings associations, as it is used in Part
160, to refer to 12 U.S.C. 1831e. This
effectively will reference the current
ratings-based requirement until such
time as the requirement is replaced by
the FDIC. In addition, the OCC is
proposing to remove references to credit
ratings applicable to commercial paper
and corporate debt securities contained
in §§ 160.40 and 160.93(e)(5)(ii). Under
the revised rules, savings associations
would be permitted to invest in
commercial paper if it meets the
standards set forth at 12 U.S.C.
1831e(d)(1), which currently limits
savings associations to purchasing
corporate debt securities that are of
investment grade, but will, after July 21,
2012, include a new creditworthiness
standard established by the FDIC.
In addition, national banks and
Federal savings associations should
continue to maintain appropriate
ongoing reviews of their investment
portfolios to verify that their portfolios
meet safety and soundness requirements
that are appropriate for the institution’s
risk profile and for the size and
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complexity of their portfolios. The OCC
is issuing this proposed supervisory
guidance explaining the due diligence
national banks and Federal savings
associations should conduct in
purchasing investment securities for
their investment portfolios and to
reiterate supervisory expectations for
the securities the institution actually
purchases.
Text of Proposed Guidance
The text of the proposed supervisory
guidance on due diligence national
banks and Federal savings associations
should conduct in assessing credit risk
for portfolio investments as required by
12 CFR Part 1and 12 CFR part 160
(specifically, 12 CFR 1.5 and 12 CFR
160.1(b) and 160.40(c)) follows:
Purpose
The Office of the Comptroller of the
Currency (OCC) is issuing this guidance
(‘‘Guidance’’) to clarify steps national
banks ordinarily should take to
demonstrate they have properly verified
their investments meet the newly
established credit quality standards
under 12 CFR part 1 and steps national
banks and Federal savings associations
should take to demonstrate they met
due diligence requirements when
purchasing investment securities and
conducting ongoing reviews of their
investment portfolios. Federal savings
associations will need to follow FDIC
requirements when that Agency
promulgates credit quality standards
under 12 U.S.C. 1831e. These standards
determine whether national banks may
purchase, sell, deal in, underwrite, and
hold securities consistent with the
authority contained in 12 U.S.C.
24(Seventh), and whether Federal
saving associations may invest in, sell,
or otherwise deal in securities
consistent with the authority contained
in 12 U.S.C. 1464(c). The activities of
national banks and Federal savings
associations also must be consistent
with safe and sound banking practices,
and this guidance reminds national
banks and Federal savings associations
of the supervisory risk management
expectations associated with
permissible investment portfolio
holdings under Part 1 and Part 160.
Background
Parts 1 and 160 provide standards for
determining whether securities have
appropriate credit quality and
marketability characteristics to be
purchased and held by national banks
or Federal savings associations. These
requirements also establish
concentration limits on the amount of
investment securities an institution may
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hold for its own account. An investment
security must be ‘‘investment grade.’’
For the purpose of Part 1, ‘‘investment
grade’’ securities are those where the
issuer has an adequate capacity to meet
the financial commitments under the
security for the projected life of the
investment. An issuer has an adequate
capacity to meet financial commitments
if the risk of default by the obligor is low
and the full and timely repayment of
principal and interest is expected.
Generally, securities with good to very
strong credit quality will meet this
standard.
National banks and Federal savings
associations must be able to
demonstrate that their investment
securities meet applicable credit quality
standards. This Guidance provides
criteria that national banks can use in
meeting Part 1 credit quality standards
and that national banks and Federal
savings associations can use in meeting
due diligence requirements.
The OCC has had a long-standing
expectation that national banks
implement a risk management process
to ensure credit risk, including credit
risk in the investment portfolio, is
effectively identified, measured,
monitored, and controlled. The 1998
Interagency Supervisory Policy
Statement on Investment Securities and
End-User Derivatives Activities (Policy
Statement) contains risk management
standards for the investment activities
of banks and savings associations.2 The
Policy Statement emphasizes the
importance of an institution conducting
a thorough credit risk analysis before
and periodically after the acquisition of
a security. Such analyses allow an
institution to understand and effectively
manage the risks within its investment
portfolio, including credit risk, and are
an essential element of a sound
investment portfolio risk management
framework. Other previously issued
guidance that supplements OCC
investment standards are OCC 2009–15,
‘‘Risk Management and Lessons
Learned’’ (which highlights lessons
learned during the market disruption
and re-emphasizes the key principles
discussed in previously issued OCC
2 On April 23, 1998, the FRB, FDIC, NCUA, OCC,
and OTS issued the ‘‘Supervisory Policy Statement
on Investment Securities and End-User Derivatives
Activities.’’ As issued by the OTS, the Policy
Statement applied to both state and Federal savings
associations.
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guidance on portfolio risk management);
OCC 2004–25, ‘‘Uniform Agreement on
the Classification of Securities’’ (which
describes the importance of
management’s credit risk analysis and
its use in examiner decisions
concerning investment security risk
ratings and classifications); and OCC
2002–19, ‘‘Supplemental Guidance,
Unsafe and Unsound Investment
Portfolio Practices’’ (which alerts banks
to the potential risk to future earnings
and capital from poor investment
decisions made during periods of low
levels of interest rates and emphasizes
the importance of maintaining prudent
credit, interest rate, and liquidity risk
management practices to control risk in
the investment portfolio).3
Determining Whether Securities Are
Permissible Prior to Purchase
The OCC’s elimination of references
to credit ratings, in accordance with the
Dodd-Frank Act, does not substantively
change the standards institutions should
use when deciding whether securities
are eligible for purchase under Part 1.
To be eligible for purchase under Part 1,
investments must meet the standard of
being ‘‘investment grade.’’ Investments
are considered ‘‘investment grade’’ if
they meet the regulatory standard for
credit quality. To meet this standard, a
national bank must be able to determine
that an investment security has (1) Low
risk of default by the obligor, and (2) the
full and timely repayment of principal
and interest is expected, over the
expected life of the investment.4 A
Federal savings association must meet
the same standard when purchasing
certain municipal revenue bonds
pursuant to 12 CFR 160.24, and they
must meet the standards in 12 U.S.C.
3 Similar requirements also apply to Federal
savings associations as set forth in OTS
Examination Handbook Section 540, Investment
Securities (January 2010).
4 Federal savings associations may invest in and
hold investment securities under section 5(c) of the
Home Owners’ Loan Act (HOLA), to the extent
specified in regulations of the OCC. While OCC
regulations imposing investment limitations
generally apply to Federal savings associations, the
Federal Deposit Insurance Act (FDIA), 12 U.S.C.
1831e(d)(1) also applies. Under this provision,
savings associations currently are prohibited from
investing in corporate debt securities unless they
are rated ‘‘investment grade.’’ However, the DoddFrank Act provides that as of July 21, 2012, this
statutory requirement will be replaced by standards
of creditworthiness established by the FDIC. Pub. L.
111–203, Section 939(a)(2) (July 21, 2010).
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73779
1831e when purchasing corporate debt
securities.
The OCC expects national banks and
Federal savings associations to conduct
an appropriate level of due diligence to
determine that an investment security is
a permissible investment. This may
include consideration of internal
analyses, third party research and
analytics including external credit
ratings, internal risk ratings, default
statistics, and other sources of
information as appropriate for the
particular security. The depth of the due
diligence should be a function of the
security’s credit quality, the complexity
of the structure, and the size of the
investment. The more complex a
security’s structure is, the more creditrelated due diligence an institution
should perform, even when the credit
quality is perceived to be very high.
Bank management should ensure they
understand the security’s structure and
how the security will perform in
different default environments, and
should be particularly diligent when
purchasing structured securities.5 The
OCC expects national banks and Federal
savings associations to consider a
variety of factors relevant to the
particular security when determining
whether a security is a permissible and
sound investment. The range and type
of specific factors an institution should
consider will vary depending on the
particular type and nature of the
securities. As a general matter, a
national bank or Federal savings
association will have a greater burden to
support its determination if one factor is
contradicted by a finding under another
factor.
Although Part 1 has no specified
quality requirements for type I
securities, as a matter of prudent
banking practice, national banks should
conduct an appropriate level of due
diligence prior to purchasing a material
amount (to the institution) of these type
I securities.
By way of example, appropriate
factors for designated types of
instruments may include but not be
limited to the following:
5 For example, a national bank or Federal savings
association should be able to demonstrate an
understanding of the effects on cash flows of a
structured security assuming varying default levels
in the underlying assets.
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Federal Register / Vol. 76, No. 229 / Tuesday, November 29, 2011 / Notices
Corporate
bonds
Key factors
mstockstill on DSK4VPTVN1PROD with NOTICES
Confirm spread to U.S. Treasuries is consistent with bonds of similar credit
quality ...........................................................................................................
Confirm risk of default is low and consistent with bonds of similar credit
quality ...........................................................................................................
Confirm capacity to pay through internal credit analysis and/or other third
party analytics, as appropriate for the particular security ............................
Evaluate the soundness of a municipal’s budgetary position and stability of
its tax revenues ............................................................................................
Understand local demographics/economics ....................................................
Assess the source and strength of revenue structure for municipal authorities ................................................................................................................
Understand the class or tranche and its relative position in the securitization
structure .......................................................................................................
Assess the position in the cash flow waterfall .................................................
Understand loss allocation rules, the potential impact of performance triggers, and support provided by credit enhancements ..................................
Evaluate and understand the quality of the underwriting of the underlying
collateral as well as any risk concentrations ...............................................
Determine whether current underwriting is consistent with the original underwriting underlying the historical performance of the collateral and consider the affect of any changes. ..................................................................
Assess the structural subordination and determine if adequate given current
underwriting standards .................................................................................
Analyze and understand the impact of collateral deterioration on tranche
performance and potential credit losses under stress scenarios ................
Maintaining an Appropriate and
Effective Portfolio Risk Management
Framework
National banks and Federal savings
associations must have in place an
appropriate risk management framework
for the level of risk in their investment
portfolios. Failure to maintain an
adequate investment portfolio risk
management process, which includes
understanding key portfolio risks, is
considered an unsafe and unsound
practice. Twelve CFR part 1 emphasizes
that national bank purchases of
investment securities must comply with
safe and sound banking practices. Under
12 CFR 1.5, national banks must
consider, as appropriate, liquidity and
price risk, as well as other risks
presented by proposed securities
activities. Federal savings associations
also must conform to safe and sound
banking practices and similarly must
consider appropriate investment
portfolio risks in their purchases of
investment securities. Applicable
guidance includes TB 73a, Thrift
Activities Asset Quality, Investment
Securities (December 18, 2001) and TB
13a, Thrift Activities Interest Rate Risk,
Investment Securities, and Derivatives
Activities (December 1, 1998).
Having a strong and robust risk
management framework appropriate for
the level of risk in an institution’s
investment portfolio is particularly
critical for managing portfolio credit
risk. A key role for management in the
oversight process is to translate the
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Municipal
government
general
obligations
Revenue
bonds
Structured
products
X
X
X
X
X
X
X
X
X
X
X
X
........................
X
X
X
........................
X
........................
........................
........................
........................
X
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........................
........................
........................
........................
........................
........................
X
X
........................
........................
........................
X
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........................
X
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........................
........................
X
........................
........................
........................
X
........................
........................
........................
X
board of directors’ tolerance for risk into
a set of internal operating policies and
procedures that govern the institution’s
investment activities. Specifically,
investment policies should provide
credit risk concentration limits. Such
limits may apply to concentrations
relating to a single or related issuer, a
geographical area, and obligations with
similar characteristics. Institutions
possessing investment portfolios that
lack diversification in one of the
aforementioned areas should enhance
their monitoring and reporting systems.
Safety and soundness principles
warrant effective concentration risk
management programs to ensure that
credit exposures do not reach an
excessive level.
Institutions should identify and
measure the risks of their investments
periodically after purchase. Such
analyses allow an institution to
understand and effectively manage the
risks within its investment portfolio,
including credit risk, and are an
essential element of a sound investment
portfolio risk management framework.
Exposure to each type of risk for each
security should be measured and
aggregated with similar exposures on an
institution-wide basis. Risk
measurement should be obtained from
sources independent of sellers or
counterparties and should be
periodically validated. Irrespective of
any contractual or other arrangements,
institutions are responsible for
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understanding and managing the risks
of all of their transactions.
Request for Comment
The OCC requests comment on all
aspects of this proposed guidance.
Specifically, the OCC would like
commenters’ views on:
1. Does the proposed guidance
sufficiently assist national banks in
making determinations of which
securities would be considered
‘‘investment grade?’’ Does it sufficiently
assist Federal savings associations in
meeting their due diligence
requirements? How could the guidance
be improved?
2. Should the guidance provide
differentiations based on size and scope
of operations for national banks and
Federal savings associations with
respect to consideration of the factors
relevant to whether a national bank or
Federal savings association has satisfied
its due diligence requirements or
whether a particular security has good
credit quality?
3. Does the proposed guidance
adequately reflect the bulk of
investment securities purchased by
national banks and Federal savings
associations? Are there other
investments that receive credit ratings
that should be included?
Dated: November 18, 2011.
John Walsh,
Acting Comptroller of the Currency.
[FR Doc. 2011–30420 Filed 11–28–11; 8:45 am]
BILLING CODE 4810–33–P
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]]>Agencies
[Federal Register Volume 76, Number 229 (Tuesday, November 29, 2011)]
[Notices]
[Pages 73777-73780]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30420]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. OCC-2011-0022]
RIN 1557-AD36
Guidance on Due Diligence Requirements in Determining Whether
Investment Securities Are Eligible for Investment
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Proposed guidance with request for comment.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC) is
proposing guidance to assist national banks and Federal savings
associations in meeting due diligence requirements in assessing credit
risk for portfolio investments.
DATES: Comments must be received December 29, 2011.
ADDRESSES: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Guidance on Due Diligence Requirements in Determining Whether
Investment Securities Are Eligible for Investment'' to facilitate the
organization and review of the comments. You may submit comments by any
of the following methods:
Email: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street SW., Mail Stop 2-3, Washington, DC 20219.
[[Page 73778]]
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2011-0022'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
FOR FURTHER INFORMATION CONTACT: Kerri Corn, Director for Market Risk,
Credit and Market Risk Division, (202) 874-4660; or Carl Kaminski,
Senior Attorney, or Kevin Korzeniewski, Attorney, Legislative and
Regulatory Activities Division, (202) 874-5090; or Eugene H. Cantor,
Counsel, Securities and Corporate Practices Division, (202) 874-5202,
Office of the Comptroller of the Currency, 250 E Street SW.,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION: Section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act \1\ requires each Federal agency,
within one year of enactment, to review: (1) Any regulations that
require the use of an assessment of the creditworthiness of a security
or money market instrument, and (2) any references to or requirements
in those regulations regarding credit ratings. Section 939A then
requires the Federal agencies to modify the regulations identified
during the review to substitute any references to or requirements of
reliance on credit ratings with such standards of creditworthiness that
each agency determines to be appropriate. The statute provides that the
agencies shall seek to establish, to the extent feasible, uniform
standards of creditworthiness, taking into account the entities the
agencies regulate and the purposes for which those entities would rely
on such standards.
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\1\ Public Law 111-203, Section 939A (July 21, 2010) (Dodd-Frank
Act).
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The Office of the Comptroller of the Currency (OCC) is issuing a
notice of proposed rulemaking (NPRM), published on the same date as
this proposed guidance. The NPRM proposes to remove references to
credit ratings in the OCC's non-capital regulations. In particular, the
OCC proposes to amend the definition of ``investment grade'' in 12 CFR
part 1 to no longer reference credit ratings. Instead, ``investment
grade'' securities would be those where the issuer has an adequate
capacity to meet the financial commitments under the security for the
projected life of the investment. An issuer has an adequate capacity to
meet financial commitments if the risk of default by the obligor is low
and the full and timely repayment of principal and interest is
expected. Generally, securities with good to very strong credit quality
will meet this standard. National banks will have to meet this new
standard before purchasing investment securities.
OCC also is proposing to define the term ``investment grade,'' for
Federal savings associations, as it is used in Part 160, to refer to 12
U.S.C. 1831e. This effectively will reference the current ratings-based
requirement until such time as the requirement is replaced by the FDIC.
In addition, the OCC is proposing to remove references to credit
ratings applicable to commercial paper and corporate debt securities
contained in Sec. Sec. 160.40 and 160.93(e)(5)(ii). Under the revised
rules, savings associations would be permitted to invest in commercial
paper if it meets the standards set forth at 12 U.S.C. 1831e(d)(1),
which currently limits savings associations to purchasing corporate
debt securities that are of investment grade, but will, after July 21,
2012, include a new creditworthiness standard established by the FDIC.
In addition, national banks and Federal savings associations should
continue to maintain appropriate ongoing reviews of their investment
portfolios to verify that their portfolios meet safety and soundness
requirements that are appropriate for the institution's risk profile
and for the size and complexity of their portfolios. The OCC is issuing
this proposed supervisory guidance explaining the due diligence
national banks and Federal savings associations should conduct in
purchasing investment securities for their investment portfolios and to
reiterate supervisory expectations for the securities the institution
actually purchases.
Text of Proposed Guidance
The text of the proposed supervisory guidance on due diligence
national banks and Federal savings associations should conduct in
assessing credit risk for portfolio investments as required by 12 CFR
Part 1and 12 CFR part 160 (specifically, 12 CFR 1.5 and 12 CFR 160.1(b)
and 160.40(c)) follows:
Purpose
The Office of the Comptroller of the Currency (OCC) is issuing this
guidance (``Guidance'') to clarify steps national banks ordinarily
should take to demonstrate they have properly verified their
investments meet the newly established credit quality standards under
12 CFR part 1 and steps national banks and Federal savings associations
should take to demonstrate they met due diligence requirements when
purchasing investment securities and conducting ongoing reviews of
their investment portfolios. Federal savings associations will need to
follow FDIC requirements when that Agency promulgates credit quality
standards under 12 U.S.C. 1831e. These standards determine whether
national banks may purchase, sell, deal in, underwrite, and hold
securities consistent with the authority contained in 12 U.S.C.
24(Seventh), and whether Federal saving associations may invest in,
sell, or otherwise deal in securities consistent with the authority
contained in 12 U.S.C. 1464(c). The activities of national banks and
Federal savings associations also must be consistent with safe and
sound banking practices, and this guidance reminds national banks and
Federal savings associations of the supervisory risk management
expectations associated with permissible investment portfolio holdings
under Part 1 and Part 160.
Background
Parts 1 and 160 provide standards for determining whether
securities have appropriate credit quality and marketability
characteristics to be purchased and held by national banks or Federal
savings associations. These requirements also establish concentration
limits on the amount of investment securities an institution may
[[Page 73779]]
hold for its own account. An investment security must be ``investment
grade.'' For the purpose of Part 1, ``investment grade'' securities are
those where the issuer has an adequate capacity to meet the financial
commitments under the security for the projected life of the
investment. An issuer has an adequate capacity to meet financial
commitments if the risk of default by the obligor is low and the full
and timely repayment of principal and interest is expected. Generally,
securities with good to very strong credit quality will meet this
standard.
National banks and Federal savings associations must be able to
demonstrate that their investment securities meet applicable credit
quality standards. This Guidance provides criteria that national banks
can use in meeting Part 1 credit quality standards and that national
banks and Federal savings associations can use in meeting due diligence
requirements.
The OCC has had a long-standing expectation that national banks
implement a risk management process to ensure credit risk, including
credit risk in the investment portfolio, is effectively identified,
measured, monitored, and controlled. The 1998 Interagency Supervisory
Policy Statement on Investment Securities and End-User Derivatives
Activities (Policy Statement) contains risk management standards for
the investment activities of banks and savings associations.\2\ The
Policy Statement emphasizes the importance of an institution conducting
a thorough credit risk analysis before and periodically after the
acquisition of a security. Such analyses allow an institution to
understand and effectively manage the risks within its investment
portfolio, including credit risk, and are an essential element of a
sound investment portfolio risk management framework. Other previously
issued guidance that supplements OCC investment standards are OCC 2009-
15, ``Risk Management and Lessons Learned'' (which highlights lessons
learned during the market disruption and re-emphasizes the key
principles discussed in previously issued OCC guidance on portfolio
risk management); OCC 2004-25, ``Uniform Agreement on the
Classification of Securities'' (which describes the importance of
management's credit risk analysis and its use in examiner decisions
concerning investment security risk ratings and classifications); and
OCC 2002-19, ``Supplemental Guidance, Unsafe and Unsound Investment
Portfolio Practices'' (which alerts banks to the potential risk to
future earnings and capital from poor investment decisions made during
periods of low levels of interest rates and emphasizes the importance
of maintaining prudent credit, interest rate, and liquidity risk
management practices to control risk in the investment portfolio).\3\
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\2\ On April 23, 1998, the FRB, FDIC, NCUA, OCC, and OTS issued
the ``Supervisory Policy Statement on Investment Securities and End-
User Derivatives Activities.'' As issued by the OTS, the Policy
Statement applied to both state and Federal savings associations.
\3\ Similar requirements also apply to Federal savings
associations as set forth in OTS Examination Handbook Section 540,
Investment Securities (January 2010).
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Determining Whether Securities Are Permissible Prior to Purchase
The OCC's elimination of references to credit ratings, in
accordance with the Dodd-Frank Act, does not substantively change the
standards institutions should use when deciding whether securities are
eligible for purchase under Part 1. To be eligible for purchase under
Part 1, investments must meet the standard of being ``investment
grade.'' Investments are considered ``investment grade'' if they meet
the regulatory standard for credit quality. To meet this standard, a
national bank must be able to determine that an investment security has
(1) Low risk of default by the obligor, and (2) the full and timely
repayment of principal and interest is expected, over the expected life
of the investment.\4\ A Federal savings association must meet the same
standard when purchasing certain municipal revenue bonds pursuant to 12
CFR 160.24, and they must meet the standards in 12 U.S.C. 1831e when
purchasing corporate debt securities.
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\4\ Federal savings associations may invest in and hold
investment securities under section 5(c) of the Home Owners' Loan
Act (HOLA), to the extent specified in regulations of the OCC. While
OCC regulations imposing investment limitations generally apply to
Federal savings associations, the Federal Deposit Insurance Act
(FDIA), 12 U.S.C. 1831e(d)(1) also applies. Under this provision,
savings associations currently are prohibited from investing in
corporate debt securities unless they are rated ``investment
grade.'' However, the Dodd-Frank Act provides that as of July 21,
2012, this statutory requirement will be replaced by standards of
creditworthiness established by the FDIC. Pub. L. 111-203, Section
939(a)(2) (July 21, 2010).
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The OCC expects national banks and Federal savings associations to
conduct an appropriate level of due diligence to determine that an
investment security is a permissible investment. This may include
consideration of internal analyses, third party research and analytics
including external credit ratings, internal risk ratings, default
statistics, and other sources of information as appropriate for the
particular security. The depth of the due diligence should be a
function of the security's credit quality, the complexity of the
structure, and the size of the investment. The more complex a
security's structure is, the more credit-related due diligence an
institution should perform, even when the credit quality is perceived
to be very high. Bank management should ensure they understand the
security's structure and how the security will perform in different
default environments, and should be particularly diligent when
purchasing structured securities.\5\ The OCC expects national banks and
Federal savings associations to consider a variety of factors relevant
to the particular security when determining whether a security is a
permissible and sound investment. The range and type of specific
factors an institution should consider will vary depending on the
particular type and nature of the securities. As a general matter, a
national bank or Federal savings association will have a greater burden
to support its determination if one factor is contradicted by a finding
under another factor.
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\5\ For example, a national bank or Federal savings association
should be able to demonstrate an understanding of the effects on
cash flows of a structured security assuming varying default levels
in the underlying assets.
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Although Part 1 has no specified quality requirements for type I
securities, as a matter of prudent banking practice, national banks
should conduct an appropriate level of due diligence prior to
purchasing a material amount (to the institution) of these type I
securities.
By way of example, appropriate factors for designated types of
instruments may include but not be limited to the following:
[[Page 73780]]
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Municipal
government Structured
Key factors Corporate bonds general Revenue bonds products
obligations
----------------------------------------------------------------------------------------------------------------
Confirm spread to U.S. Treasuries is X X X X
consistent with bonds of similar credit
quality....................................
Confirm risk of default is low and X X X X
consistent with bonds of similar credit
quality....................................
Confirm capacity to pay through internal X X X X
credit analysis and/or other third party
analytics, as appropriate for the
particular security........................
Evaluate the soundness of a municipal's ............... X ............... ...............
budgetary position and stability of its tax
revenues...................................
Understand local demographics/economics..... X X X ...............
Assess the source and strength of revenue ............... ............... X ...............
structure for municipal authorities........
Understand the class or tranche and its ............... ............... ............... X
relative position in the securitization
structure..................................
Assess the position in the cash flow ............... ............... ............... X
waterfall..................................
Understand loss allocation rules, the ............... ............... ............... X
potential impact of performance triggers,
and support provided by credit enhancements
Evaluate and understand the quality of the ............... ............... ............... X
underwriting of the underlying collateral
as well as any risk concentrations.........
Determine whether current underwriting is ............... ............... ............... X
consistent with the original underwriting
underlying the historical performance of
the collateral and consider the affect of
any changes................................
Assess the structural subordination and ............... ............... ............... X
determine if adequate given current
underwriting standards.....................
Analyze and understand the impact of ............... ............... ............... X
collateral deterioration on tranche
performance and potential credit losses
under stress scenarios.....................
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Maintaining an Appropriate and Effective Portfolio Risk Management
Framework
National banks and Federal savings associations must have in place
an appropriate risk management framework for the level of risk in their
investment portfolios. Failure to maintain an adequate investment
portfolio risk management process, which includes understanding key
portfolio risks, is considered an unsafe and unsound practice. Twelve
CFR part 1 emphasizes that national bank purchases of investment
securities must comply with safe and sound banking practices. Under 12
CFR 1.5, national banks must consider, as appropriate, liquidity and
price risk, as well as other risks presented by proposed securities
activities. Federal savings associations also must conform to safe and
sound banking practices and similarly must consider appropriate
investment portfolio risks in their purchases of investment securities.
Applicable guidance includes TB 73a, Thrift Activities Asset Quality,
Investment Securities (December 18, 2001) and TB 13a, Thrift Activities
Interest Rate Risk, Investment Securities, and Derivatives Activities
(December 1, 1998).
Having a strong and robust risk management framework appropriate
for the level of risk in an institution's investment portfolio is
particularly critical for managing portfolio credit risk. A key role
for management in the oversight process is to translate the board of
directors' tolerance for risk into a set of internal operating policies
and procedures that govern the institution's investment activities.
Specifically, investment policies should provide credit risk
concentration limits. Such limits may apply to concentrations relating
to a single or related issuer, a geographical area, and obligations
with similar characteristics. Institutions possessing investment
portfolios that lack diversification in one of the aforementioned areas
should enhance their monitoring and reporting systems. Safety and
soundness principles warrant effective concentration risk management
programs to ensure that credit exposures do not reach an excessive
level.
Institutions should identify and measure the risks of their
investments periodically after purchase. Such analyses allow an
institution to understand and effectively manage the risks within its
investment portfolio, including credit risk, and are an essential
element of a sound investment portfolio risk management framework.
Exposure to each type of risk for each security should be measured and
aggregated with similar exposures on an institution-wide basis. Risk
measurement should be obtained from sources independent of sellers or
counterparties and should be periodically validated. Irrespective of
any contractual or other arrangements, institutions are responsible for
understanding and managing the risks of all of their transactions.
Request for Comment
The OCC requests comment on all aspects of this proposed guidance.
Specifically, the OCC would like commenters' views on:
1. Does the proposed guidance sufficiently assist national banks in
making determinations of which securities would be considered
``investment grade?'' Does it sufficiently assist Federal savings
associations in meeting their due diligence requirements? How could the
guidance be improved?
2. Should the guidance provide differentiations based on size and
scope of operations for national banks and Federal savings associations
with respect to consideration of the factors relevant to whether a
national bank or Federal savings association has satisfied its due
diligence requirements or whether a particular security has good credit
quality?
3. Does the proposed guidance adequately reflect the bulk of
investment securities purchased by national banks and Federal savings
associations? Are there other investments that receive credit ratings
that should be included?
Dated: November 18, 2011.
John Walsh,
Acting Comptroller of the Currency.
[FR Doc. 2011-30420 Filed 11-28-11; 8:45 am]
BILLING CODE 4810-33-P
