Single-Counterparty Credit Limits for Large Banking Organizations, 14327-14364 [2016-05386]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 81, Number 51 (Wednesday, March 16, 2016)]
[Proposed Rules]
[Pages 14327-14364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-05386]



[[Page 14327]]

Vol. 81

Wednesday,

No. 51

March 16, 2016

Part IV





Federal Reserve System





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12 CFR Part 252





Single-Counterparty Credit Limits for Large Banking Organizations; 
Proposed Rule

Federal Register / Vol. 81, No. 51 / Wednesday, March 16, 2016 / 
Proposed Rules

[[Page 14328]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 252

[Regulation YY; Docket No. R-1534]
RIN 7100-AE 48


Single-Counterparty Credit Limits for Large Banking Organizations

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is inviting comment on proposed rules that would 
establish single-counterparty credit limits for domestic and foreign 
bank holding companies with $50 billion or more in total consolidated 
assets. The proposed rules would implement section 165(e) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, which requires 
the Board to impose limits on the amount of credit exposure that such a 
domestic or foreign bank holding company can have to an unaffiliated 
company in order to reduce the risks arising from the company's 
failure. The proposed rules, which build on earlier proposed rules by 
the Board to establish single-counterparty credit limits for large 
domestic and foreign banking organizations, would increase in 
stringency based on the systemic importance of the firms to which they 
apply.

DATES: Comments should be received by June 3, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1534 and 
RIN No. 7100 AE-48, by any of the following methods:
     Agency Web site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street (between 18th and 19th Streets 
NW.) Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jordan Bleicher, Senior Supervisory 
Financial Analyst, (202) 973-6123, Division of Banking Supervision and 
Regulation; or Laurie Schaffer, Associate General Counsel, (202) 452-
2272, Benjamin McDonough, Special Counsel, (202) 452-2036, Pam 
Nardolilli, Senior Counsel, (202) 452-3289, or Lucy Chang, Attorney, 
(202) 475-6331, Legal Division, Board of Governors of the Federal 
Reserve System, 20th and C Streets NW., Washington, DC 20551. For the 
hearing impaired only, Telecommunications Device for the Deaf (TDD) 
users may contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. General Background
    B. Summary of Comments on the 2011 and 2012 Proposals
II. Proposed Rule for Domestic Bank Holding Companies
    A. Overview of the Proposed Rule for Domestic Bank Holding 
Companies
III. Proposed Rule for Foreign Banking Organizations
    A. Background
    B. Overview of the Proposed Rule for Foreign Banking 
Organizations
IV. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Solicitation of Comments on the Use of Plain Language
    C. Regulatory Flexibility Act Analysis

Background

General Background

    During the 2007-2008 financial crisis, some of the largest 
financial firms in the world collapsed or experienced material 
financial distress. Counterparties of failing firms were placed under 
severe strain when the failing firm could not meet its financial 
obligations, in some cases resulting in the counterparties' inability 
to meet their own financial obligations. Similarly, weakened financial 
firms came under increased stress when counterparties with large 
exposures to the firm suddenly attempted to reduce those exposures.
    The effect of a large financial institution's failure or near 
collapse is amplified by the mutual interconnectedness of large, 
systemically important firms--that is, the degree to which they extend 
each other credit and serve as counterparties to one another. As 
demonstrated during the crisis, financial distress at a banking 
organization may materially raise the likelihood of distress at other 
firms given the network of contractual obligations throughout the 
financial system. Accordingly, a large banking organization's systemic 
impact is likely to be directly related to its interconnectedness vis-
[agrave]-vis other financial institutions and the financial sector as a 
whole. This interconnectedness of financial firms also creates the 
potential for an increase in the likelihood of distress at non-
financial firms that are dependent upon financial firms for funding.
    The financial crisis also revealed inadequacies in the U.S. 
regulatory approach to credit exposure limits, which limited only some 
of the interconnectedness among large financial companies. For example, 
certain commercial banks were subject to single-borrower lending and 
investment limits. However, these limits often excluded credit 
exposures generated by derivatives and some securities financing 
transactions, and did not apply at the consolidated holding company 
level.\1\
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    \1\ Section 610 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) amends the term ``loans and 
extensions of credit'' for purposes of the lending limits applicable 
to national banks to include any credit exposure arising from a 
derivative transaction, repurchase agreement, reverse repurchase 
agreement, securities lending transaction, or securities borrowing 
transaction. See Dodd-Frank Act, Public Law 111-203, 610, 124 Stat. 
1376, 1611 (2010), codified at 12 U.S.C. 84(b). As discussed in more 
detail below, these types of transactions also are made subject to 
the single-counterparty credit limits of section 165(e). 12 U.S.C. 
5365(e)(3).
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    Section 165(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) authorizes the Board to establish 
single-counterparty credit limits for bank holding companies with total 
consolidated assets of $50 billion or more (covered companies) and 
foreign banking organizations with total consolidated assets of $50 
billion or more, and any U.S. intermediate holding company (covered 
entities), in order to limit the risks that the failure of any 
individual firm could pose to a covered company.\2\ This section 
prohibits covered companies and covered entities from having credit 
exposure to any unaffiliated company that exceeds 25 percent of the 
capital stock and surplus of the covered company, or such lower amount 
as the Board may determine by regulation to be necessary to mitigate 
risks to the financial stability of the United States.\3\
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    \2\ See 12 U.S.C. 5365(e)(1).
    \3\ 12 U.S.C. 5365(e)(2).

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[[Page 14329]]

    Credit exposure to a company is defined in section 165(e) of the 
Dodd-Frank Act to mean all extensions of credit to the company, 
including loans, deposits, and lines of credit; all repurchase 
agreements, reverse repurchase agreements, and securities borrowing and 
lending transactions with the company (to the extent that such 
transactions create credit exposure for the covered company); all 
guarantees, acceptances, and letters of credit (including endorsement 
or standby letters of credit) issued on behalf of the company; all 
purchases of, or investments in, securities issued by the company; 
counterparty credit exposure to the company in connection with 
derivative transactions between the covered company and the company; 
and any other similar transaction that the Board, by regulation, 
determines to be a credit exposure for purposes of section 165.\4\
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    \4\ See 12 U.S.C. 5365(e)(3).
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    Section 165(e) also grants the Board authority to issue such 
regulations and orders, including definitions consistent with section 
165(e), as may be necessary to administer and carry out that section. 
In addition, it authorizes the Board to exempt transactions, in whole 
or in part, from the definition of the term ``credit exposure,'' if the 
Board finds that the exemption is in the public interest and consistent 
with the purposes of section 165(e).\5\ Finally, section 165(e) 
authorizes the Board to establish single-counterparty credit limits for 
nonbank financial companies designated by the Financial Stability 
Oversight Council (FSOC) for supervision by the Board. The draft 
proposed rules would not at this time apply to any such nonbank 
financial company. The Board intends to apply similar requirements to 
these companies separately by rule or order at a later time.
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    \5\ See 12 U.S.C. 5365(e)(5)-(6).
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    The proposed framework of credit exposure limits for covered 
companies is similar to existing limits for depository institutions, 
including the investment securities limits and the lending limits 
imposed on certain depository institutions.\6\ A national bank 
generally is limited, subject to certain exceptions, in the total 
amount of investment securities of any one obligor that it may purchase 
for its own account to no more than 10 percent of its capital stock and 
surplus.\7\ In addition, a national bank's total outstanding loans and 
extensions of credit to one borrower may not exceed 15 percent of the 
bank's capital stock and surplus, plus an additional 10 percent of the 
bank's capital stock and surplus, if the amount that exceeds the bank's 
15 percent general limit is fully secured by readily-marketable 
collateral.\8\
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    \6\ See, e.g., 12 U.S.C. 24(7); 12 U.S.C. 84; 12 CFR 1 and 32; 
see also 12 U.S.C. 335 (applying the provisions of 12 U.S.C. 24(7) 
to state member banks).
    \7\ See 12 U.S.C. 24(7); 12 CFR 1.
    \8\ See 12 U.S.C. 84; 12 CFR 32.3. State-chartered banks, as 
well as state and federally-chartered savings associations, also are 
subject to lending limits imposed by relevant state and federal law.
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    The requirements in section 165(e) operate as a separate and 
independent limit from the investment securities limits and lending 
limits in the National Bank Act and Federal Reserve Act, and a covered 
company or covered entity must comply with all of the limits that are 
applicable to it and its subsidiaries. A covered company would be 
required to ensure that it does not exceed the single-counterparty 
credit limits when all the credit exposures of the organization are 
consolidated. Because the proposed rules would impose limits on credit 
transactions by a covered company or covered entity on a consolidated 
basis, including its subsidiary depository institutions, the proposed 
rules may affect the amount of loans and extensions of credit that 
would otherwise be consistent with a subsidiary depository 
institution's lending limits.
    The Board invited public comment on proposed rules to implement 
section 165(e) for domestic banking organizations in December 2011 and 
for foreign banking organizations in December 2012.\9\ The Board is re-
proposing rules to implement section 165(e) in order to take account of 
(1) the large volume of comments received on the original 165(e) 
proposed rules from banks, trade associations, public interest groups, 
and others; (2) the revised lending limits rules applicable to national 
banks; \10\ (3) the introduction by the Basel Committee on Banking 
Supervision (BCBS) of a large exposures standard (LE Standard), which 
establishes an international standard for the maximum amount of credit 
exposure that an internationally active bank is permitted to have to a 
single counterparty; \11\ and (4) the results of quantitative impact 
studies and related analysis conducted by Board staff to help gauge the 
impact of the original 165(e) proposed rules and these revised rules.
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    \9\ https://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htm; https://www.federalreserve.gov/newsevents/press/bcreg/20121214a.htm.
    \10\ See 78 FR 37930 (June 25, 2013).
    \11\ https://www.bis.org/press/p140415.htm.
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Summary of Comments on the 2011 and 2012 Proposals

    The Board received 48 comments, representing approximately 60 
parties, on the 2011 proposal on section 165(e) as it relates to 
domestic firms and 35 comments, representing over 45 organizations, on 
the 2012 proposed rule as it relates to foreign banking organizations. 
The comments were received from a wide range of individuals, banking 
organizations, industry and trade groups representing banking, 
insurance, and the broader financial services industry, and public 
interest groups. Board staff also met with industry representatives and 
government representatives to discuss issues relating to the proposed 
rules.
    Some commenters expressed support for the broader goals of the 
proposed rules to limit single-counterparty concentrations at large 
financial companies. Numerous commenters expressed concerns, however, 
about various aspects of the proposed rules. The Board received 
comments on all aspects of the proposed rules, and the Board has taken 
into consideration these comments in these revised proposed rules for 
section 165(e).
    In the 2011 proposed rule, the Board proposed to limit the 
aggregate net credit exposure of a covered company to a single 
unaffiliated counterparty to no more than 25 percent of the 
consolidated capital stock and surplus of the covered company. The 
Board further proposed to limit the aggregate net credit exposure of 
U.S. bank holding companies with over $500 billion in assets to any 
other unaffiliated bank holding company of similar size, or to a 
nonbank financial company designated by the FSOC for supervision by the 
Board, to 10 percent of the capital stock and surplus of the covered 
company.
    Several commenters questioned the Board's basis for lowering the 25 
percent statutory limit to 10 percent. These commenters generally 
questioned the financial stability need for the lower limit and 
questioned whether the 10 percent limit would have disruptive effects, 
such as reducing market liquidity, decreasing loan capacity, and 
driving financial services to the shadow banking sector. Several 
commenters questioned the Board's basis for selecting a $500 billion 
asset threshold as the cutoff for the lower 25 percent statutory credit 
limit. Commenters representing the insurance industry criticized the 
proposed standard because it did not take into account the unique 
features of the insurance business. The Board also received

[[Page 14330]]

several comments that supported imposing the more stringent limits on 
single-counterparty credit exposures between very large organizations.
    Some commenters on the 2011 proposed rule urged the Board to base 
single-counterparty credit limits on a narrower definition of capital. 
For example, one commenter noted that a central finding of the 
financial crisis was that only common equity was reliably loss 
absorbing, and further observed that the Basel III capital standard 
reflects this through its redefinition of capital instruments. This 
commenter also argued that there are advantages to coordinating 
regulatory capital definitions around a limited number of capital 
definitions that include only instruments that are reliably loss 
absorbing.
    In its 2011 proposed rule, the Board proposed to exempt credit 
exposures that were direct claims on, and the portions of claims that 
were directly and fully guaranteed as to principal and interest by, the 
United States and its agencies. Many commenters supported expanding 
this exemption to include creditworthy non-U.S. sovereigns. Several 
commenters noted that sovereign entities generally are not regarded as 
``companies,'' and the statute covers exposures to companies. Others 
argued there is no rationale for distinguishing between U.S. and other 
highly-rated sovereign exposures and that limiting the amount of 
exposure that a covered company can have to a highly-rated sovereign 
may increase systemic risk by limiting the company's ability to invest 
in or accept as collateral instruments issued by such sovereigns. 
Commenters suggested that exposures to those sovereigns that are 
assigned a low risk-weight under the Basel Capital rules should be 
exempt.
    Commenters questioned the Board's approach to measuring the 
exposures resulting from derivative transactions. Under the 2011 
proposed rule, a covered company generally would have been required to 
calculate credit exposure to a derivatives counterparty using the 
Current Exposure Method (CEM). Commenters argued that CEM is 
insufficiently risk-sensitive and that it overstates the realistic 
economic exposure of a derivative transaction. Commenters attributed 
this issue in significant part to the fact that CEM limits the extent 
to which netting benefits are taken into account in calculating 
counterparty exposures.
    Some commenters also criticized the Board's proposed approach to 
measuring exposures from securities financing transactions.\12\ These 
commenters argued that the collateral volatility haircuts included in 
the 2011 proposed rule do not recognize the risk-mitigating value of 
positive correlations between securities on loan and securities 
received as collateral. These commenters also pointed out that under 
the Board's risk-based capital rules, collateral volatility haircuts 
for securities lending and repurchase transactions reflect a five-day 
liquidation period, rather than the ten-day period used in the proposed 
165(e) rule.
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    \12\ ``Securities financing transactions'' include repurchase 
agreements, reverse repurchase agreements, securities lending 
transactions, and securities borrowing transactions.
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    Many of the comments received concerning the proposed rule for 
foreign banking organizations were similar to those filed with respect 
to the domestic proposed rule, especially regarding the 2012 proposed 
rule's treatment of foreign sovereign instruments. Some commenters 
argued that, in light of the BCBS's development of the LE Standard that 
would apply to a foreign banking organization on a consolidated basis, 
it was unnecessary for the Board to develop single-counterparty credit 
limits for a foreign banking organization's combined U.S. operations. 
Some commenters also expressed concerns related to the definition of 
the relevant capital base for their organizations. For example, some 
foreign banking organizations that expected to form intermediate 
holding companies (IHCs) to hold their U.S. subsidiaries were concerned 
that their relevant capital base would be restricted to the capital of 
the IHC, and not the relevant consolidated capital level of their 
entire company.
    After a review of these comments, the Board has modified the 
proposed rules in a number of key respects. The Board welcomes comments 
on all aspects of the proposed rules, including on the various 
questions and alternatives discussed below.

Proposed Rule for Domestic Bank Holding Companies

Overview of Proposed Rule for Domestic Bank Holding Companies

    Under the proposed rule to implement section 165(e) of the Dodd-
Frank Act, the aggregate net credit exposure of a bank holding company 
with total consolidated assets of $50 billion or more (covered company) 
to a single counterparty would be subject to one of three increasingly 
stringent credit exposure limits. The first category of limits would 
apply to covered companies that have less than $250 billion in total 
consolidated assets and less than $10 billion in on-balance-sheet 
foreign exposures. Covered companies that have less than $250 billion 
in total consolidated assets and less than $10 billion in on-balance 
sheet foreign exposures would be prohibited from having aggregate net 
credit exposure to an unaffiliated counterparty in excess of 25 percent 
of the covered company's total capital stock and surplus, defined under 
the rule as the covered company's total regulatory capital plus 
allowance for loan and lease losses (ALLL).
    The second category of exposure limits would prohibit any covered 
company with $250 billion or more in total consolidated assets or $10 
billion or more in total on-balance-sheet foreign exposures, but which 
is not a global systemically important banking organization, from 
having aggregate net credit exposure to an unaffiliated counterparty in 
excess of 25 percent of the covered company's tier 1 capital.
    The third category of exposure limits would prohibit any covered 
company that is a global systemically important banking organization 
(major covered company) from having aggregate net credit exposure in 
excess of 15 percent of the major covered company's tier 1 capital to a 
major counterparty, and 25 percent of the major covered company's tier 
1 capital to any other counterparty. A ``major counterparty'' would be 
defined as a global systemically important banking organization or a 
nonbank financial company supervised by the Board. This framework would 
be consistent with the requirement in section 165(a)(1)(B) of the Dodd-
Frank Act that the enhanced standards established by the Board under 
section 165 increase in stringency based on factors such as the nature, 
scope, size, scale, concentration, interconnectedness, and mix of the 
activities of the company.\13\ The credit exposure limits are 
summarized in Table 1.
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    \13\ 12 U.S.C. 5323, 5365(e).

[[Page 14331]]



    Table 1--Single-Counterparty Credit Limits Applicable to Covered
                                Companies
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                                            Applicable credit exposure
      Category of covered company                     limit
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Covered companies that have less than    Aggregate net credit exposure
 $250 billion in total consolidated       to a counterparty cannot
 assets and less than $10 billion in on-  exceed 25 percent of a covered
 balance-sheet foreign exposures.         company's total regulatory
                                          capital plus ALLL.
Covered companies that have $250         Aggregate net credit exposure
 billion or more in total consolidated    to a counterparty cannot
 assets or $10 billion or more in on-     exceed 25 percent of a covered
 balance-sheet foreign exposures, but     company's tier 1 capital.
 are not major covered companies.
Major covered companies................  Aggregate net credit exposure
                                          to a major counterparty cannot
                                          exceed 15 percent of a major
                                          covered company's tier 1
                                          capital.
                                         Aggregate net credit exposure
                                          to other counterparties cannot
                                          exceed 25 percent of a major
                                          covered company's tier 1
                                          capital.
------------------------------------------------------------------------

    The limits of the proposed rule would apply to the credit exposures 
of a covered company on a consolidated basis, including any 
subsidiaries, to any unaffiliated counterparty. A ``subsidiary'' of a 
covered company would mean a company that is directly or indirectly 
controlled by the specified company for purposes of the Bank Holding 
Company Act of 1956, 12 U.S.C. 1841 et seq.\14\ If an investment fund 
or vehicle is not controlled by a covered company, the exposures of 
such fund or vehicle to its counterparties would not be aggregated with 
those of the covered company for purposes of the proposed single-
counterparty credit limits applicable to that covered company.
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    \14\ See proposed rule Sec.  252.71(cc); see also section 
252.2(g) of the Board's Regulation YY (12 CFR 252.2(g)).
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    A bank holding company should be able to monitor and control its 
credit exposures on a consolidated basis, including the credit 
exposures of its subsidiaries. Applying the single-counterparty credit 
limits in the proposed rule to bank holding companies on a consolidated 
basis, which would include the credit exposures of their subsidiaries, 
would help to avoid evasion of the rule's purposes.
    Question 1: As noted, the proposed rule would apply the single-
counterparty credit limits to covered companies on a consolidated basis 
and could, therefore, impact the level of credit exposures of 
subsidiaries of these covered companies, including depository 
institutions. Is application on a consolidated basis appropriate?
    Question 2: Should the definition of a ``subsidiary'' of a covered 
company for purposes of single-counterparty credit limits be based on 
the definition in the Bank Holding Company Act of 1956? Should a 
``subsidiary'' instead be defined as any entity that a covered company 
(1) owns, controls, or holds with power to vote 25 percent or more of a 
class of voting securities; (2) owns or controls 25 percent or more of 
the total equity; or (3) consolidates for financial reporting purposes?
    Question 3: Should funds or vehicles that a covered company 
sponsors or advises be expressly included as part of the covered 
company for purposes of the proposed rule? Should the proposed rule's 
definition of ``subsidiary'' be expanded to include any investment fund 
or vehicle advised or sponsored by a covered company? Should the 
proposed rule's definition of ``subsidiary'' be expanded to include any 
other entity?
    The proposed rule would establish limits on the credit exposure of 
a covered company to a single ``counterparty.'' \15\ A counterparty 
would be defined to include natural persons (including the person's 
immediate family); a U.S. State (including all of its agencies, 
instrumentalities, and political subdivisions); and certain foreign 
sovereign entities (including their agencies, instrumentalities, and 
political subdivisions). The Board is proposing to include individuals 
and certain governmental entities within the definition of a 
``counterparty'' because credit exposures to such entities create risks 
to the covered company that are similar to those created by large 
exposures to companies. The severe distress or failure of an 
individual, U.S. state or municipality, or sovereign entity could have 
effects on a covered company that are comparable to those caused by the 
failure of a financial firm or nonfinancial corporation to which the 
covered company has a large credit exposure. With respect to sovereign 
entities, these risks are most acute in the case of sovereigns that 
present greater credit risk. Therefore, the proposed rule would subject 
credit exposures to individuals, U.S. states and municipalities, and 
foreign sovereign governments that do not receive a zero percent risk 
weight under the Board's Standardized Approach risk-based capital rules 
in Regulation Q to the credit exposure framework in the same manner as 
credit exposures to companies.\16\
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    \15\ See proposed rule Sec.  252.71(e).
    \16\ See 12 CFR part 217, subpart D.
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    The Board proposes to extend the single-counterparty credit limits 
to individuals, U.S. states, and certain foreign sovereigns using two 
authorities. Under section 165(b)(1)(b) of the Dodd-Frank Act, the 
Board may impose such additional enhanced prudential standards as the 
Board of Governors determines are appropriate.\17\ In addition, under 
section 5(b) of the Bank Holding Company Act, the Board may to issue 
such regulations as may be necessary to enable it to administer and 
carry out the purposes of this chapter and prevent evasions 
thereof.\18\ Such purposes include examining the financial, 
operational, and other risks within the bank holding company system 
that may pose a threat to (1) the safety and soundness of the bank 
holding company or of any depository institution subsidiary of the bank 
holding company; or (2) the stability of the financial system of the 
United States.\19\ The proposed rule would help to promote the safety 
and soundness of a covered company and mitigate risks to financial 
stability by limiting a covered company's maximum credit exposure to an 
individual, U.S. state, or foreign sovereign, and thereby reducing the 
risk that the failure of such individual or entity could cause the 
failure or material financial distress of a covered company.
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    \17\ 12 U.S.C. 5363(b)(1)(B).
    \18\ 12 U.S.C. 1844(b).
    \19\ 12 U.S.C. 1844(c)(2)(A)(i)(II).
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    For purposes of the proposed credit exposure limits, a covered 
company's exposures to a ``counterparty'' would include not only 
exposures to that particular entity but also exposures to any person 
with respect to which the counterparty (1) owns, controls, or holds 
with power to vote 25 percent or more of a class of voting securities; 
(2) owns or controls 25 percent or more of

[[Page 14332]]

the total equity; or (3) consolidates for financial reporting purposes. 
To the extent that one or more of these conditions are met with respect 
to a company's relationship to an investment fund or vehicle, exposures 
to such fund or vehicle would need to be aggregated with that 
counterparty.
    Question 4: Under what circumstances should funds or vehicles that 
a counterparty sponsors or advises be expressly included as part of the 
counterparty for purposes of the proposed rule?
    Further, in cases where total exposures to a single counterparty 
exceed five percent of the covered company's eligible capital base 
(i.e., total regulatory capital plus ALLL or tier 1 capital), the 
covered company would need to add to exposures to that counterparty all 
exposures to other counterparties that are ``economically 
interdependent'' with the first counterparty. The purpose of this 
proposed requirement is to limit a covered company's overall credit 
exposure to two or more counterparties where the underlying risk of one 
counterparty's financial distress or failure would cause the financial 
distress or failure of another counterparty. In particular, under the 
proposed rule, two counterparties would be considered economically 
interdependent when it is the case that, if one of the counterparties 
were to experience financial problems, the other counterparty would be 
likely to experience financial problems as a result. In determining 
whether two entities are economically interdependent, a covered company 
would be required to take into account (1) whether 50 percent of one 
counterparty's gross receipts or gross expenditures are derived from 
transactions with the other counterparty; (2) whether one counterparty 
has fully or partly guaranteed the exposure of the other counterparty, 
or is liable by other means, and the exposure is significant enough 
that the guarantor is likely to default if a claim occurs; (3) whether 
a significant part of one counterparty's production or output is sold 
to the other counterparty, which cannot easily be replaced by other 
customers; (4) whether one counterparty has made a loan to the other 
counterparty and is relying on repayment of that loan in order to 
satisfy its obligations to the covered company, and the first 
counterparty does not have another source of income that it can use to 
satisfy its obligations to the covered company; (5) whether it is 
likely that financial distress of one counterparty would cause 
difficulties for the other counterparty in terms of full and timely 
repayment of liabilities; and (6) when both counterparties rely on the 
same source for the majority of their funding and, in the event of the 
common provider's default, an alternative provider cannot be found.\20\
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    \20\ See proposed rule Sec.  252.76(a).
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    Two entities that are economically interdependent would be expected 
to default on their exposures in a highly correlated manner, and 
therefore they would be treated as a single counterparty for purposes 
of the proposed rule. At the same time, there may be cases in which the 
burdens of investigating economic interdependence would outweigh its 
credit risk mitigating benefits to the covered company. For this 
reason, a covered company would only be required to assess whether 
counterparties are economically interdependent if the sum of the 
covered company's exposures to one individual counterparty exceeds five 
percent of the covered company's capital stock and surplus, in the case 
of a covered company that does not have $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures, and tier 1 capital, in the case of a covered company 
with $250 billion or more in total consolidated assets or $10 billion 
or more in total on-balance-sheet foreign exposures.
    In addition, under the proposed rule, a covered company would be 
required to add to exposures of an unaffiliated counterparty all 
exposures to other counterparties that are connected by certain control 
relationships, such as (i) the presence of voting agreements; (ii) the 
ability of one counterparty to influence significantly the appointment 
or dismissal of another counterparty's administrative, management or 
supervisory body, or the fact that a majority of members have been 
appointed solely as a result of the exercise of the first entity's 
voting rights; and (iii) the ability of one counterparty to 
significantly influence senior management or to exercise a controlling 
influence over the management or policies of another counterparty.\21\ 
As with cases where two companies are economically interdependent, in 
cases where a counterparty is subject to some degree of control by 
another counterparty, a covered company's overall aggregate credit risk 
with respect to the two counterparties may be understated if such 
control relationships are not identified and their credit exposures 
added together for purposes of the proposed rule.
---------------------------------------------------------------------------

    \21\ See proposed rule Sec.  252.76(b).

    Example: A covered company has credit exposures to both a bank 
and a fund that is sponsored by the bank. The bank does not (1) own, 
control, or hold with power to vote 25 percent or more of a class of 
voting securities of the fund; (2) own or control 25 percent or more 
of the total equity of the fund; or (3) consolidate the fund for 
financial reporting purposes. Thus, the covered company generally 
would not be required to aggregate its exposures to the bank and the 
fund. The bank does, however, have the ability to appoint a majority 
of the directors of the fund. Under the proposed rule, a covered 
company would be required to add its credit exposures to the fund to 
the covered company's credit exposures to the bank for purposes of 
determining whether the covered company is in compliance with the 
---------------------------------------------------------------------------
proposed rule.

    Question 5: Should covered companies be required to aggregate 
exposures to entities that are economically interdependent? Are the 
criteria for determining whether entities are economically 
interdependent sufficiently clear, and if not, how should the criteria 
be further clarified? Should covered companies only be required to 
identify entities as economically interdependent when exposure to one 
of the entities exceeds five percent of the covered company's capital 
stock and surplus, in the case of a covered company that does not have 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance-sheet foreign exposures, and tier 1 capital, 
in the case of a covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures? Should only covered companies with $250 billion or 
more in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures be required to identify entities as 
economically interdependent? What other threshold(s) would be 
appropriate and why?
    Question 6: What operational or other challenges, if any, would 
covered companies face in identifying companies that are economically 
interdependent? Will covered companies have access to all of the 
information needed to complete the analysis of economic 
interdependence? Is this type of information collected by covered 
companies in the ordinary course of business as part of underwriting or 
other, similar processes?
    Question 7: Should covered companies be required to aggregate 
exposures to entities that are connected by certain control 
relationships? Should

[[Page 14333]]

covered companies only be required to aggregate exposures to entities 
that are connected by certain control relationships if the exposure 
exceeds five percent of the covered company's capital stock and 
surplus, in the case of a covered company that does not have $250 
billion or more in total consolidated assets or $10 billion or more in 
total on-balance-sheet foreign exposures, and tier 1 capital, in the 
case of a covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures? Should only covered companies with $250 billion or 
more in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures be required to aggregate exposures to 
entities that are connected by certain control relationships? Are the 
criteria for determining whether entities are connected by control 
relationships sufficiently clear, and if not, how could the criteria be 
further clarified? Are there additional criteria that the Board should 
consider?
    Section 165(e) of the Dodd-Frank Act directs the Board to impose 
single-counterparty credit limits based on the ``capital stock and 
surplus'' of a covered company, or ``such lower amount as the Board may 
determine by regulation to be necessary to mitigate risks to the 
financial stability of the United States.'' \22\ Under the proposed 
rule, ``capital stock and surplus'' of a covered company would be 
defined as the sum of the company's total regulatory capital as 
calculated under the capital adequacy guidelines applicable to that 
bank holding company under Regulation Q (12 CFR part 217) and the 
balance of the bank holding company's ALLL not included in tier 2 
capital under the capital adequacy guidelines applicable to that bank 
holding company under Regulation Q (12 CFR part 217).\23\ This 
definition of capital stock and surplus is conceptually similar to the 
definition of the same term in the Board's Regulations O and W and the 
OCC's national bank lending limit regulation.\24\
---------------------------------------------------------------------------

    \22\ 12 U.S.C. 5365(e)(2).
    \23\ See proposed rule Sec.  252.71(d).
    \24\ See 12 CFR 215.3(i), 12 CFR 223.3(d); see also 12 CFR 
32.2(b).
---------------------------------------------------------------------------

    As indicated, for those covered companies with $250 billion or more 
in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposure, the proposed credit limits would be 
calculated by reference to those companies' tier 1 capital as defined 
under Regulation Q, rather than their total regulatory capital plus 
ALLL.\25\ A key financial stability benefit of single-counterparty 
credit limits is that such limits help reduce the likelihood that the 
failure of one financial institution will lead to the failure of other 
financial institutions. By reducing the likelihood of multiple 
simultaneous failures arising from interconnectedness, single-
counterparty credit limits reduce the probability of future financial 
crises and the social costs that would be associated with such crises. 
For this benefit to be realized, single-counterparty credit limits for 
firms whose failure is more likely to have an adverse impact on 
financial stability need to be based on a measure of capital that is 
available to absorb losses on a going-concern basis.
---------------------------------------------------------------------------

    \25\ See 12 CFR 217.2; 12 CFR 217.20.
---------------------------------------------------------------------------

    Total regulatory capital plus ALLL includes capital elements that 
do not absorb losses on a going-concern basis. For example, total 
regulatory capital includes a covered company's subordinated debt, 
which is senior in the creditor hierarchy to equity and therefore only 
takes losses once a company's equity has been wiped out. In contrast, a 
company's tier 1 capital consists only of equity claims on the company, 
such as common equity and certain preferred shares. By definition, 
these equity claims are available to absorb losses on a going-concern 
basis. Therefore, in order to limit the aggregate net credit exposure 
that a covered company with $250 billion or more in total consolidated 
assets or $10 billion or more in total on-balance-sheet foreign 
exposures can have to a single counterparty relative to the covered 
company's ability to absorb losses on a going-concern basis, single-
counterparty credit limits applicable to such companies should be based 
on their tier 1 capital. Basing single-counterparty credit limits for 
such companies on tier 1 capital also is consistent with the direction 
given in section 165(a)(1)(B) of the Dodd-Frank Act to impose enhanced 
prudential standards that increase in stringency based on the systemic 
footprint of the firms to which they apply.\26\
---------------------------------------------------------------------------

    \26\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Basing single-counterparty credit limits for covered companies with 
total consolidated assets of $250 billion or more, or $10 billion or 
more in on-balance-sheet foreign exposures on tier 1 capital would be 
consistent with lessons learned during the financial crisis of 2007-
2009. During the crisis, counterparties and other creditors of 
distressed financial institutions discounted lower-quality regulatory 
capital instruments issued by such institutions, such as trust 
preferred shares, hybrid capital instruments, and other term 
instruments. Instead, market participants focused on a financial 
institution's common equity capital and other simple, perpetual-
maturity instruments that now qualify as tier 1 regulatory capital. For 
this reason, the Board's revised capital framework introduced a new 
definition of common equity tier 1 capital, restricted the set of 
instruments that qualify as additional tier 1 capital, and raised the 
tier 1 capital regulatory minimum from 4 to 6 percent.\27\ In contrast, 
the Board's revised capital framework left the total regulatory capital 
minimum requirement unchanged from its pre-crisis calibration of 8 
percent.
---------------------------------------------------------------------------

    \27\ See 12 CFR part 217.
---------------------------------------------------------------------------

    Thus, basing single-counterparty credit limits for such covered 
companies on tier 1 capital would be consistent with the post-crisis 
focus on higher-quality forms of capital and, based on the experience 
in the crisis whereby market participants significantly discounted the 
value of capital instruments such as subordinate debt that count in 
total regulatory capital, would provide a more reliable capital base 
for the credit limits. In addition, the analysis that follows suggests 
that using a narrower definition of capital for such covered companies 
could help to mitigate risks to U.S. financial stability.
    The marginal impact of basing single-counterparty credit limits on 
tier 1 capital for firms with $250 billion or more in total assets, or 
$10 billion or more in on-balance-sheet foreign exposures, appears to 
be limited. As of September 30, 2015, tier 1 capital represented 
approximately 82 percent of the total regulatory capital plus ALLL for 
these firms. Further, the quantitative impact study Board staff 
conducted to help gauge the likely effects of the proposed requirements 
suggests that using tier 1 capital as the eligible capital base for 
bank holding companies with $250 billion or more in total consolidated 
assets or $10 billion or more in total on-balance-sheet foreign 
exposures likely would increase the total amount of excess exposure 
among U.S. bank holding companies by approximately $30 billion. This 
incremental amount of excess credit exposure could be largely 
eliminated by firms through compression of derivatives, collection of 
additional collateral from counterparties, greater use of central 
clearing, and modest rebalancing of portfolios among counterparties.

[[Page 14334]]

    Question 8: Are the proposed definitions relating to capital stock 
and surplus and tier 1 capital clear? Should the single-counterparty 
credit limits applicable to covered companies with $250 billion or more 
in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures be based on a different capital base 
than that used for other firms?
Credit Exposure Limits
    Section 252.72 of the proposed rule contains the key quantitative 
limitations on credit exposure of a covered company to a single 
counterparty.\28\ First, the general limit in proposed section 252.72 
provides that no covered company may have aggregate net credit exposure 
to any unaffiliated counterparty in excess of 25 percent of the capital 
stock and surplus or tier 1 capital, as appropriate, of the covered 
company.\29\ Second, proposed section 252.72 provides that no ``major 
covered company,'' defined as a covered company that is a U.S. global 
systemically important banking organization, may have aggregate net 
credit exposure to a major counterparty in excess of 15 percent of the 
major covered company's tier 1 capital.\30\ ``Aggregate net credit 
exposure'' would be defined in this section to mean the sum of all net 
credit exposures of a covered company to a single counterparty.\31\ As 
described in detail below, sections 252.73 and 252.74 of the proposed 
rule describe how a covered company would calculate gross and net 
credit exposure in order to arrive at the aggregate net credit exposure 
relevant to the single-counterparty credit limits in section 
252.72.\32\
---------------------------------------------------------------------------

    \28\ See proposed rule Sec.  252.72.
    \29\ See proposed rule Sec. Sec.  252.72(a)-(b).
    \30\ See proposed rule Sec.  252.72(c).
    \31\ See proposed rule Sec.  252.71(b).
    \32\ See proposed rule Sec. Sec.  252.73-252.74.
---------------------------------------------------------------------------

    A ``major counterparty'' would be defined as (1) any major covered 
company and all of its subsidiaries, collectively; (2) any foreign 
banking organization and all of its subsidiaries, collectively, that 
would be considered a global systemically important foreign banking 
organization; and (3) any nonbank financial company supervised by the 
Board.\33\
---------------------------------------------------------------------------

    \33\ See proposed rule Sec.  252.72(v). The Financial Stability 
Board maintains and periodically publishes a list of entities that 
have the characteristics of a global systemically important banking 
organization: https://www.fsb.org/.
---------------------------------------------------------------------------

    The Board's proposed rule regarding the single-counterparty credit 
limits that should apply to credit exposures of a major covered company 
to a major counterparty reflects the financial stability consequences 
associated with such credit extensions. A credit extension between a 
major covered company and a major counterparty is expected to result in 
a heightened degree of credit risk to the major covered company 
relative to the case in which a major covered company extends credit to 
a counterparty that is not a major counterparty. The heightened credit 
risk arises because major covered companies and major counterparties 
are often engaged in common business lines and often have common 
counterparties and common funding sources. This creates a significant 
degree of commonality in their economic performance. In particular, 
factors that would likely cause the distress of a major counterparty 
would also likely be expected to simultaneously adversely affect a 
major covered company that has extended credit to the major 
counterparty. As a result, such credit extensions would be expected to 
present more credit risk, and greater potential for financial 
instability, than a credit extension made by a major covered company to 
a counterparty that is not a major counterparty.
    In a white paper that has been released in conjunction with these 
proposed rules, Board staff has analyzed data on the default 
correlation between systemically important financial institutions 
(SIFIs) as well as data on the default correlation between SIFIs and a 
sample of non-SIFI companies.\34\ The analysis supports the view that 
the correlation between SIFIs, and hence the correlation between major 
covered companies and major counterparties, is measurably higher than 
the correlation between SIFIs and other companies. This finding further 
supports the view that credit extensions between SIFIs, and hence by a 
major covered company to a major counterparty, present a higher degree 
of risk and the potential for greater financial instability than credit 
extensions of a major covered company to a non-major counterparty.
---------------------------------------------------------------------------

    \34\ See Calibrating the Single-Counterparty Credit Limit 
between Systemically Important Financial Institutions. For purposes 
of the white paper, SIFIs include global systemically important 
banking organizations and nonbank financial companies designated by 
FSOC for supervision by the Board.
---------------------------------------------------------------------------

    Because credit extensions of a major covered company to a major 
counterparty present a heightened degree of credit risk and a greater 
potential for heightened financial instability, the Board is proposing 
to set a more stringent single-counterparty credit limit for credit 
extensions between a major covered company and a major counterparty of 
15 percent rather than the statutory limit of 25 percent. The more 
stringent credit limit of 15 percent is informed by the results of a 
credit risk model that is described in detail in the white paper. More 
specifically, data on correlations, as described above, is used to 
calibrate a credit risk model. The credit risk model is then used to 
set the single-counterparty credit limit between SIFIs such that the 
amount of credit risk that a SIFI is permitted to incur through 
extensions of credit to another SIFI is no greater than the amount of 
credit risk that the SIFI would be permitted to incur through 
extensions of credit to a non-SIFI under the 25 percent limit 
applicable to such exposures. The resulting calibrated model produces 
inter-SIFI single-counterparty credit limits that are in line with the 
proposed limit of 15 percent.
    An additional consideration that is not considered explicitly in 
the context of the white paper's credit risk model, but which should 
influence the calibration of the credit limit between major covered 
companies and major counterparties, is the relative difference in 
adverse consequences arising from multiple SIFI defaults relative to 
the default of a SIFI and non-SIFI counterparty. The financial 
stability consequences of multiple SIFI defaults caused by the default 
of a SIFI borrower and the resulting default of a SIFI lender are 
likely substantially greater than the adverse consequences that would 
result from the default of a single SIFI lender and a single non-SIFI 
borrower. As a result, there is a compelling rationale to require that 
credit risk posed by inter-SIFI credit extensions be materially smaller 
than that posed by credit extensions between a SIFI lender and non-SIFI 
borrower. This consideration suggests that an appropriate inter-SIFI 
single-counterparty credit limit would be even lower than the 15 
percent limit suggested by the calibrated credit risk model that is 
presented in the white paper.
    Accordingly, the more stringent 15 percent single-counterparty 
credit limit on credit exposures of a major covered company to a major 
counterparty should help to mitigate risks to U.S. financial stability. 
The Board seeks comment on the analytical rationale that has been 
presented for a tighter single-counterparty credit limit for exposures 
of a major covered company to a major counterparty. The Board also 
invites comment on the data, analysis, and economic model that is used 
in the white paper to support the proposed more stringent limit. 
Commenters are encouraged to provide any specific

[[Page 14335]]

analyses that could be used to support an alternative view on the 
appropriate level of the single-counterparty credit limit between major 
covered companies and major counterparties.
    Question 9: Should more stringent credit exposure limits apply to 
credit exposures of a major covered company to a major counterparty 
than would apply to other credit exposures?
    Question 10: Are the proposed definitions of a ``major covered 
company'' and a ``major counterparty'' appropriate? What alternative 
definitions should the Board consider?
    Question 11: Should more stringent credit exposure limits apply to 
exposures of major covered companies to a nonbank financial company 
that has been designated by FSOC for Board supervision? Should more 
stringent limits also apply to exposures of a major covered company to 
other entities that have been designated as global systemically 
important financial institutions by the Financial Stability Board ( 
e.g., global systemically important insurance companies)? If so, what 
limits should apply?
    Question 12: What other limits or modifications to the proposed 
limits on aggregate net credit exposure should the Board consider? For 
example, should the Board consider developing aggregate exposure limits 
to certain categories of firms (e.g., a limit on the aggregate amount 
of credit exposure that a major covered company can have to all major 
counterparties)? How should the Board identify any such categories and 
the applicable exposure thresholds?
Gross Credit Exposure
    As noted, the proposed rule would impose limits on a covered 
company's aggregate net credit exposure, rather than aggregate gross 
credit exposure, to a counterparty. The key difference between these 
two amounts is that a company's net credit exposure would take into 
account any available credit risk mitigants, such as collateral, 
guarantees, credit or equity derivatives, and other hedges, provided 
the credit risk mitigants meet certain requirements in the rule, as 
discussed more fully below. For example, if a covered company had $100 
in gross credit exposure to a counterparty with respect to a particular 
credit transaction, and the counterparty pledged collateral with an 
adjusted market value of $50, the full amount of which qualified as 
``eligible collateral'' under the rule, the covered company's net 
credit exposure to the counterparty on the transaction would be $50.
    In order to calculate its aggregate net credit exposure to a 
counterparty, a covered company first would calculate its gross credit 
exposure to the counterparty on each credit transaction in accordance 
with certain valuation and other requirements under the rule. Second, 
the covered company would reduce its gross credit exposure amount based 
on eligible credit risk mitigants to determine its net credit exposure 
for each credit transaction with the counterparty. Third and finally, 
the covered company would sum all of its net credit exposures to the 
counterparty to calculate the covered company's aggregate net credit 
exposure to the counterparty. It is this final amount, the aggregate 
net credit exposure, that would be subject to a credit exposure limit 
under the rule.
    With respect to a credit exposure involving eligible collateral or 
an eligible protection provider, the proposed rule would apply a 
``risk-shifting'' approach. In general, any reduction in the exposure 
amount to the original counterparty relating to the eligible collateral 
or eligible protection provider would result in a dollar-for-dollar 
increase in exposure to the eligible collateral issuer or eligible 
protection provider (as applicable). For example, in the case discussed 
above where a covered company had $100 in gross credit exposure to a 
counterparty and the counterparty pledged collateral with an adjusted 
market value of $50, the covered company would have net credit exposure 
to the counterparty on the transaction of $50 and net credit exposure 
to the issuer of the collateral of $50.
    However, in cases where a covered company hedges its exposure to an 
entity that is not a ``financial entity'' (a non-financial entity) 
using an eligible credit or equity derivative, and the underlying 
exposure is subject to the Board's market risk capital rule (12 CFR 
part 217, subpart F), the covered company would calculate its exposure 
to the eligible protection provider using methodologies that it is 
permitted to use under the Board's risk-based capital rules. For these 
purposes, a ``financial entity'' would include regulated U.S. financial 
institutions, such as insurance companies, broker-dealers, banks, 
thrifts, and futures commission merchants, as well as foreign banking 
organizations and a non-U.S.-based securities firm or a non-U.S.-based 
insurance company subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies.\35\ ``Financial entities'' 
would also include companies whose primary business includes the 
management of financial assets, lending, factoring, leasing, provision 
of credit enhancements, securitization, investments, financial custody, 
central counterparty services, proprietary trading, insurance, and 
other financial services.\36\
---------------------------------------------------------------------------

    \35\ See proposed rule Sec.  252.71(q).
    \36\ Id.
---------------------------------------------------------------------------

    Question 13: Is the definition of a ``financial entity'' 
sufficiently clear? If not, what further guidance should be provided?
    Section 252.73 of the proposed rule explains in detail how a 
covered company would calculate its ``gross credit exposure'' with 
respect to a counterparty. Gross credit exposure would be defined to 
mean, with respect to any credit transaction, the credit exposure of 
the covered company to the counterparty before adjusting for the effect 
of any qualifying master netting agreements, eligible collateral, 
eligible guarantees, eligible credit derivatives and eligible equity 
derivatives, and other eligible hedges (i.e., a short position in the 
counterparty's debt or equity securities).\37\ Consistent with the 
statutory definition of credit exposure, the proposed rule defines 
``credit transaction'' to mean, with respect to a counterparty, any (i) 
extension of credit to the counterparty, including loans, deposits, and 
lines of credit, but excluding advised or other uncommitted lines of 
credit; (ii) repurchase or reverse repurchase agreement with the 
counterparty; (iii) securities lending or securities borrowing 
transaction with the counterparty; (iv) guarantee, acceptance, or 
letter of credit (including any confirmed letter of credit or standby 
letter of credit) issued on behalf of the counterparty; (v) purchase 
of, or investment in, securities issued by the counterparty; (vi) 
credit exposure to the counterparty in connection with a derivative 
transaction between the covered company and the counterparty; (vii) 
credit exposure to the counterparty in connection with a credit 
derivative or equity derivative transaction between the covered company 
and a third party, the reference asset of which is an obligation or 
equity security issued by the counterparty; \38\ and (viii) any 
transaction that is the functional equivalent of the above, and any 
similar transaction that the Board determines to

[[Page 14336]]

be a credit transaction for purposes of this subpart.\39\
---------------------------------------------------------------------------

    \37\ See proposed rule Sec.  252.71(r). Section 252.74 of the 
proposed rule explains how these adjustments are made.
    \38\ ``Credit derivative'' and ``equity derivative'' are defined 
in sections 252.71(g) and (p) of the proposed rule, respectively.
    \39\ See proposed rule Sec.  252.71(h). The definition of 
``credit transaction'' in the proposed rule is similar to the 
definition of ``credit exposure'' in section 165(e) of the Dodd-
Frank Act. See 12 U.S.C. 5365(e)(3).
---------------------------------------------------------------------------

    Section 252.73 describes how the gross credit exposure of a covered 
company to a counterparty should be calculated for each type of credit 
transaction described above.\40\ In general, the methodologies 
contained in the proposed rule are similar to those used to calculate 
credit exposure under the standardized risk-based capital rules for 
bank holding companies.\41\ More specifically, section 252.73(a) of the 
proposed rule provides that, for purposes of calculating gross credit 
exposure:
---------------------------------------------------------------------------

    \40\ See proposed rule Sec.  252.73(a)(1)-(12).
    \41\ 12 CFR part 217, subpart D.
---------------------------------------------------------------------------

    (1) The value of loans by a covered company to a counterparty (and 
leases in which the covered company is the lessor and the counterparty 
is the lessee) would be equal to the amount owed by the counterparty to 
the covered company under the transaction;
    (2) The value of debt securities held by the covered company that 
are issued by the counterparty would be equal to the market value of 
the securities (in the case of trading and available-for-sale 
securities) or the amortized purchase price of the securities (in the 
case of securities that are held to maturity);
    (3) The value of equity securities held by the covered company that 
are issued by the counterparty would be equal to the market value of 
such securities;
    (4) The value of repurchase agreements would be equal to the 
adjusted market value of the securities transferred by the covered 
company to the counterparty;
    (5) The value of reverse repurchase agreements would be equal to 
the amount of cash transferred by the covered company to the 
counterparty;
    (6) The value of securities borrowing transactions would be equal 
to the sum of the amount of cash collateral transferred by the covered 
company to the counterparty and the adjusted market value of the 
securities collateral transferred to the counterparty;
    (7) The value of securities lending transactions would be equal to 
the adjusted market value of the securities lent by the covered company 
to the counterparty;
    (8) Committed credit lines extended by a covered company to the 
counterparty would be valued at the face amount of the credit line;
    (9) Guarantees and letters of credit issued by a covered company on 
behalf of the counterparty would be equal to the maximum potential loss 
to the covered company on the transaction;
    (10) Derivative transactions between the covered company and the 
counterparty not subject to a qualifying master netting agreement would 
be valued in an amount equal to the sum of the current exposure of the 
derivatives contract and the potential future exposure of the 
derivatives contract, calculated using methodologies that the covered 
company is permitted to use under Regulation Q (12 CFR part 217, 
subparts D and E);
    (11) Derivative transactions between the covered company and the 
counterparty subject to a qualifying master netting agreement would be 
valued in an amount equal to the exposure at default amount calculated 
using methodologies that the covered company is permitted to use under 
subpart E of Regulation Q (12 CFR part 217); and
    (12) Credit or equity derivative transactions between the covered 
company and a third party where the covered company is the protection 
provider and the reference asset is an obligation or equity security of 
the counterparty, would be valued in an amount equal to the maximum 
potential loss to the covered company on the transaction.
    Under the proposed rule, trading and available-for-sale debt 
securities held by the covered company, as well as equity securities, 
would be valued for purposes of single-counterparty credit limits based 
on their market value. This approach would require a covered company to 
revalue upwards the amount of an investment in such securities when the 
market value of the securities increases. In these circumstances, the 
re-valuation would reflect the covered company's greater financial 
exposure to the counterparty and would reduce the covered company's 
ability to engage in additional transactions with the counterparty. In 
circumstances where the market value of the securities falls, however, 
a covered company under the proposal would revalue downwards its 
exposure to the issuer of the securities. This reflects the fact that, 
just as an increase in the value of a security results in greater 
exposure to the issuer of that security, a decrease in the value of the 
security leaves a firm with less exposure to that issuer.
    Question 14: Should the Board provide further guidance regarding 
the calculation of the ``market value'' of a debt or equity security, 
particularly for securities that are illiquid or otherwise hard-to-
value? If so, what guidance should be provided?
    In the context of repurchase agreements, securities borrowing 
transactions, and securities lending transactions, the ``adjusted 
market value'' of a security would mean the sum of (i) the market value 
of the security and (ii) the market value of the security multiplied by 
the product of (a) the collateral haircut set forth in Table 1 to 
section 217.132 of the Board's Regulation Q (12 CFR 217.132) that is 
applicable to the security and (b) the square root of \1/2\.\42\ The 
purpose of adjusting the value of a security in this manner is to 
capture the market volatility (and associated potential increase in 
counterparty credit exposure) of the securities transferred or lent by 
the covered company in these transactions. Multiplying the values in 
Table 1 to section 217.132 of the Board's Regulation Q by the square 
root of \1/2\ would align with the requirements in the Board's risk-
based capital rules, which assume a 5-day liquidation period for 
``repo-style'' transactions,\43\ rather than the 10-day liquidation 
period that is assumed for other transactions. With respect to 
derivative transactions between a covered company and a counterparty 
that are not subject to a qualifying master netting agreement, the 
gross credit exposure of a covered company to the counterparty would be 
valued as the sum of the current exposure and the potential future 
exposure of the contract.\44\ With respect to derivative transactions 
between a covered company and a counterparty that are subject to a 
qualifying master netting agreement, the proposed rule would require 
covered companies to calculate gross credit exposure to a counterparty 
as the amount that would be calculated using any methodologies that the 
covered company is permitted to use under the Board's risk-based 
capital rules (12 CFR part 217, subpart D and E).\45\ This approach 
would allow certain covered companies to calculate counterparty 
exposures for derivatives transactions subject to a qualifying master 
netting agreement using the internal model method in the Board's 
Regulation Q (12 CFR part 217, subpart E). The Board is

[[Page 14337]]

proposing this approach, rather than proposing to require all covered 
companies to use CEM because of concerns that CEM may not take fully 
into account correlations and netting relationships, and therefore, 
under certain circumstances, may overstate counterparty credit risk.
---------------------------------------------------------------------------

    \42\ See proposed rule Sec.  252.71(a).
    \43\ A ``repo-style'' transaction is a repurchase or reverse 
repurchase transaction, or a securities borrowing or lending 
transaction, that meets certain criteria. See 12 CFR 217.2.
    \44\ See proposed rule Sec.  252.73(a)(10). ``Qualifying master 
netting agreement'' is defined in section 252.71(z) of the proposed 
rule in a manner consistent with the Board's advanced risk-based 
capital rules for bank holding companies.
    \45\ See proposed rule Sec.  252.73(a)(11).
---------------------------------------------------------------------------

    The Board notes, however, that the BCBS has recently finalized a 
revised standardized approach (SA-CCR) for measuring credit exposure to 
a derivatives counterparty.\46\ The Board expects to consider the 
benefits of incorporating SA-CCR in the single-counterparty credit 
limit rule at such time as the Board considers the benefits of SA-CCR 
for risk-based capital purposes.
---------------------------------------------------------------------------

    \46\ See https://www.bis.org/publ/bcbs279.htm.
---------------------------------------------------------------------------

    With respect to derivative transactions between a covered company 
and a third party, where the covered company is the protection provider 
and the reference asset is an obligation or equity security of the 
counterparty, the credit exposure of the covered company to the 
counterparty would be equal to the maximum potential loss to the 
covered company on the transaction.\47\
---------------------------------------------------------------------------

    \47\ See proposed rule Sec.  252.73(a)(12). ``Credit 
derivative'' is defined in Sec.  252.71(g) of the proposed rule, and 
``equity derivative'' is defined in Sec.  252.71(p) of the proposed 
rule. ``Derivative transaction'' is defined in Sec.  252.71(j) of 
the proposed rule in the same manner as it is defined in the 
National Bank Act, as amended by section 610 of the Dodd-Frank Act. 
See 12 U.S.C. 84(b)(3).
---------------------------------------------------------------------------

    With respect to cleared and uncleared derivatives, the amount of 
initial margin and excess variation margin (i.e., variation margin in 
excess of that needed to secure the mark-to-market value of a 
derivative) posted to a bilateral or central counterparty would be 
treated as credit exposure to the counterparty unless the margin is 
held in a segregated account at a third party custodian.
    Section 252.73(c) of the proposed rule includes the statutory 
attribution rule, which provides that a covered company must treat a 
transaction with any person as a credit exposure to a counterparty to 
the extent the proceeds of the transaction are used for the benefit of, 
or transferred to, that counterparty.\48\ This attribution rule seeks 
to prevent firms from evading the single-counterparty credit limits by 
using intermediaries and thereby avoiding a direct credit transaction 
with a particular counterparty. It is the Board's intention to avoid 
interpreting the attribution rule in a manner that would impose undue 
burden on covered companies by requiring firms to monitor and trace the 
proceeds of transactions made in the ordinary course of business. In 
general, credit exposures resulting from transactions made in the 
ordinary course of business will not be subject to the attribution 
rule.
---------------------------------------------------------------------------

    \48\ See proposed rule Sec.  252.73(c); see also 12 U.S.C. 
5365(e)(4).
---------------------------------------------------------------------------

    Question 15: The Board invites comment on all aspects of the 
proposed approaches for calculating gross credit exposures.
    Question 16: With respect to derivative transactions, the Board 
invites comment on the proposed reliance on the methodologies covered 
companies are permitted to use under the risk-based capital rules. 
Should covered companies instead be required to use CEM? Should the 
single-counterparty credit limits rule ultimately require use of SA-CCR 
or a similar standardized approach to measure a covered company's 
credit exposure to derivatives counterparties?
    Question 17: With respect to credit or equity derivative 
transactions between the covered company and a third party, where the 
covered company is the protection provider and the reference asset is 
an obligation or equity security of the counterparty, is it 
sufficiently clear how a covered company would calculate its ``maximum 
potential loss''? What additional guidance, if any, should the Board 
provide?
    Question 18: With respect to credit derivatives, equity 
derivatives, guarantees, and letters of credit, are there cases in 
which ``maximum potential loss to the covered company'' arising from 
the transaction is indeterminate? How should single-counterparty credit 
limits apply in those instances?
    Question 19: The Board invites comment on ways to apply the 
statutory attribution rule in a manner that would be consistent with 
the goal of preventing evasion of the single-counterparty credit limits 
without imposing undue burden on covered companies. Is additional 
regulatory clarity around the attribution rule necessary? What is the 
potential cost or burden of applying the attribution rule as proposed?
Net Credit Exposure
    As noted, the proposed rule would impose limits on a covered 
company's net credit exposure to a counterparty. ``Net credit 
exposure'' would be defined to mean, with respect to any credit 
transaction, the gross credit exposure of a covered company calculated 
under section 252.73, as adjusted in accordance with section 
252.74.\49\ Section 252.74 of the proposed rule explains how a covered 
company would convert gross credit exposure amounts to net credit 
exposure amounts by taking into account eligible collateral, eligible 
guarantees, eligible credit and equity derivatives, other eligible 
hedges (for example, a short position in the counterparty's debt or 
equity securities), and for securities financing transactions, the 
effect also of bilateral netting agreements.\50\
---------------------------------------------------------------------------

    \49\ See proposed rule Sec.  252.71(x).
    \50\ See proposed rule Sec.  252.74.
---------------------------------------------------------------------------

Calculation of Net Credit Exposure for Securities Financing 
Transactions

    With respect to any repurchase transaction, reverse repurchase 
transaction, securities lending transaction, and securities borrowing 
transaction with a counterparty that is subject to a bilateral netting 
agreement with that counterparty and that meets the definition of 
``repo-style transaction'' in section 217.2 of the Board's Regulation Q 
(12 CFR 217.2), a covered company's net credit exposure to a 
counterparty generally would be equal to the exposure at default amount 
calculated under section 217.37(c)(2) of the Board's Regulation Q (12 
CFR 217.37(c)(2)), applying standardized supervisory haircuts as 
provided in 12 CFR 217.37(c)(3)(iii).\51\ A covered company would not 
be permitted to apply its own internal estimates for haircuts. Further, 
in calculating its net credit exposure to a counterparty as a result of 
such transactions, a covered company would be required to disregard any 
collateral received from that counterparty that does not meet the 
definition of ``eligible collateral'' in Sec.  252.71(k).
---------------------------------------------------------------------------

    \51\ Pursuant to 12 CFR 217.37(c)(3)(iii), a bank that is 
engaged in a repo-style transaction may multiply the standardized 
supervisory haircuts that would otherwise apply pursuant to Table 1 
to Sec.  217.37 of the Board's Regulation Q by the square root of 
\1/2\.
---------------------------------------------------------------------------

    The proposal would also require a covered company to recognize a 
credit exposure to any issuer of eligible collateral that is used to 
reduce the covered company's gross credit exposure from a transaction 
described in the preceding paragraph. The amount of credit exposure 
that a covered company would be required to recognize to an issuer of 
such collateral would be equal to the market value of the collateral 
minus the standardized supervisory haircuts provided in 12 CFR 
217.37(c)(2)(ii). However, in no event would the amount of credit 
exposure that a covered company is required to recognize to such a 
collateral issuer be in excess of its gross credit exposure to the 
counterparty on the original credit transaction.
    Some commenters on the 2011 section 165(e) proposed rule objected 
to the

[[Page 14338]]

proposed methodology for netting securities financing transactions as 
overly conservative. The commenters generally argued that the proposed 
approach implied unrealistic assumptions about correlations among 
securities that a covered company transfers to its counterparty and 
received from that counterparty. For example, if a covered company 
loans equity securities to a counterparty and receives equity 
securities from the counterparty as collateral, the proposed 
methodology implied that, upon the counterparty's default, the value of 
the equities transferred to the counterparty would increase in value 
while the value of the equities received would decrease in value.
    In developing this proposed rule, the Board considered several 
alternatives to address these concerns. First, the Board considered 
allowing covered firms only to apply valuation adjustments to one side 
of a securities financing transaction where the securities transferred 
and received from a counterparty are of the same asset class. For 
example, if a covered company loans equity securities to a counterparty 
and receives equity securities from the counterparty as collateral, the 
covered company could be permitted to apply valuation adjustments only 
to the value of the equity securities that have been transferred to the 
counterparty. This would be a relatively simple way of taking account 
of the fact that securities in the same asset class tend to be somewhat 
positively correlated.
    Second, the Board considered a methodology similar to the one 
recently proposed by the BCBS in its second consultative document on 
potential revisions to the standardized approach to credit risk.\52\ 
Under the formula proposed by the Basel Committee, an entity's exposure 
for repo-style transactions would be equal to 40 percent of its ``net 
exposure'' from the transaction plus 60 percent of its ``gross 
exposure'' divided by the square root of the number of security issues 
in the netting set. In this formula, the ``net exposure'' term is 
intended to reflect the effect of netting long positions and short 
positions because the volatility haircuts that would apply to long 
positions would be allowed to offset those that apply to short 
positions. Although volatility haircuts would not offset when 
calculating gross exposure, gross exposure would reflect the effect of 
diversification by dividing the gross exposure amount by the square 
root of the number of exposures.
---------------------------------------------------------------------------

    \52\ https://www.bis.org/bcbs/publ/d347.pdf.
---------------------------------------------------------------------------

    Third, the Board considered allowing credit exposure from repo-
style transactions to be measured using standardized correlation 
matrices. Under this approach, securities would be divided into a 
handful of asset classes (for example, sovereign securities, corporate 
and municipal debt, and equities). Based on distinctions between asset 
classes, specific assumptions about correlations within portfolios of 
securities transferred to or received from a counterparty, as well as 
assumptions about correlations across portfolios of securities 
transferred and received, would be provided. These standardized 
correlation assumptions, together with standardized volatility haircuts 
for the relevant securities, would serve as inputs into a formula that 
would yield an estimate of a covered company's credit exposure to its 
counterparty. Again, this could provide a more accurate way of taking 
into account correlations among securities.
    The first alternative would permit a covered company to apply 
valuation adjustments to only one side of a securities financing 
transaction where the securities transferred and received from a 
counterparty are of the same asset class. While this approach is meant 
to reflect the fact that securities in the same asset class are 
generally positively correlated, some securities in the same asset 
class may also be negative correlated. In addition, assumptions about 
asset correlations based on observations during normal times may break 
down during periods of extreme market turbulence, when large credit 
exposures of financial institutions to their counterparties could pose 
the greatest risk to financial stability. The second and third 
alternatives would increase the complexity of the framework and 
potentially make the framework susceptible to arbitrage. For the 
foregoing reasons, the proposed rule does not include these 
alternatives.
    Question 20: Should the Board consider alternative approaches to 
measuring the net credit exposure from securities financing 
transactions? What are the advantages and disadvantages of such 
alternative measurement approaches relative to the proposed approach?

Collateral

    Section 252.74(c) of the proposed rule describes how eligible 
collateral would be taken into account in the calculation of net credit 
exposure.\53\ ``Eligible collateral'' would be defined to include cash 
on deposit with a covered company (including cash held for the covered 
company by a third-party custodian or trustee); debt securities (other 
than mortgage- or asset-backed securities \54\) that are bank-eligible 
investments and that have an investment grade rating; equity securities 
that are publicly traded; or convertible bonds that are publicly 
traded.\55\ For any of these asset types to count as eligible 
collateral for a credit transaction, the covered company generally 
would be required to have a perfected, first priority security interest 
in the collateral or the legal equivalent thereof, if outside of the 
United States. This list of eligible collateral would be similar to the 
list of eligible collateral in Regulation Q.\56\
---------------------------------------------------------------------------

    \53\ See proposed rule Sec.  252.74(c).
    \54\ The proposed rule generally would exclude mortgage-backed 
securities and other asset-backed securities from the definition of 
``eligible collateral'' because of concerns that those securities 
may be more likely than other securities to become illiquid and lose 
value during periods of financial instability. However, asset-backed 
securities guaranteed by a U.S. government sponsored entity, such as 
Ginnie Mae, Fannie Mae, or Freddie Mac, would qualify as eligible 
collateral under the proposed rule.
    \55\ See proposed rule Sec.  252.71(k); see also 12 CFR 252.2(p) 
(defining ``publicly traded'').
    \56\ See 12 CFR 217.2.
---------------------------------------------------------------------------

    In computing its net credit exposure to a counterparty with respect 
to a credit transaction, a covered company would be required to reduce 
its gross credit exposure on the transaction by the adjusted market 
value of any eligible collateral.\57\ Other than in the context of 
repo-style transactions, the ``adjusted market value'' of eligible 
collateral would be defined in section 252.71(a) of the proposed rule 
to mean the fair market value of the eligible collateral after 
application of the applicable haircut specified in Table 1 to section 
217.132 of the Board's Regulation Q for that type of eligible 
collateral.\58\
---------------------------------------------------------------------------

    \57\ See proposed rule Sec.  252.74(c).
    \58\ Table 1 to section 217.132 of the Board's Regulation Q (12 
CFR 217.132) provides haircuts for multiple collateral types, 
including some types that do not meet the proposed definition of 
``eligible collateral.'' Notwithstanding the inclusion of those 
collateral types in the reference table, a company cannot reduce its 
gross credit exposure for a transaction with a counterparty based on 
the adjusted market value of collateral that does not meet the 
definition of ``eligible collateral.''
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    The net credit exposure of a covered company to a counterparty on a 
credit transaction is the gross credit exposure of the covered company 
on the transaction minus the adjusted market value of any eligible 
collateral related to the transaction.\59\ In addition, under the

[[Page 14339]]

proposed rule, a covered company generally must recognize a credit 
exposure to the collateral issuer in an amount equal to the adjusted 
market value of the collateral. As such, the amount of credit exposure 
to the original counterparty and the issuer of the eligible collateral 
would fluctuate over time based on the adjusted market value of the 
eligible collateral. Collateral that previously met the definition of 
eligible collateral under the proposed rule but over time ceases to do 
so would no longer be eligible to reduce gross credit exposure.
---------------------------------------------------------------------------

    \59\ The Board is proposing to treat eligible collateral as a 
gross credit exposure to the collateral issuer under the Board's 
authority under section 165(e) to determine that any other similar 
transaction is a credit exposure. See 12 U.S.C. 5365(e)(3)(F).
---------------------------------------------------------------------------

    In effect, the proposed treatment of eligible collateral would 
require a covered company to shift its credit exposure from the 
original counterparty to the issuer of such collateral. This approach 
would help to promote a covered company's careful monitoring of its 
direct and indirect credit exposures. So as not to discourage 
overcollateralization, however, a covered company's maximum credit 
exposure to the collateral issuer would be limited to the credit 
exposure to the original counterparty.\60\
---------------------------------------------------------------------------

    \60\ See proposed rule Sec.  252.74(c)(2).
---------------------------------------------------------------------------

    A covered company would continue to have credit exposure to the 
original counterparty to the extent that the adjusted market value of 
the eligible collateral does not equal the full amount of the credit 
exposure to the original counterparty.

    Example: A covered company (Company A) makes a $1,000 loan to a 
counterparty (Company B), creating $1,000 of gross credit exposure 
to that counterparty, and the counterparty provides eligible 
collateral issued by a third party (Company C) that has an adjusted 
market value of $700 on day 1. Company A would be required to reduce 
its credit exposure to Company B by the adjusted market value of the 
eligible collateral. As a result, on day 1, Company A would have 
gross credit exposure of $700 to Company C and $300 net credit 
exposure to Company B.

    As noted, the amount of credit exposure to the original 
counterparty and the issuer of the eligible collateral will fluctuate 
over time based on movements in the adjusted market value of the 
eligible collateral. If the adjusted market value of the eligible 
collateral decreased to $400 on day 2 in the previous example, on day 2 
Company A's net credit exposure to Company B would increase to $600, 
and its gross credit exposure to Company C would decrease to $400. By 
contrast, if on day 3 the adjusted market value of the eligible 
collateral increased to $800, on day 3 Company A's net credit exposure 
to Company B would decrease to $200, and its gross credit exposure to 
Company C would increase to $800. In each case, the covered company's 
total credit exposure would be capped at the original amount of the 
exposure created by the loan or $1,000--even if the adjusted market 
value of the eligible collateral exceeded $1,000.
    Finally, in cases where eligible collateral is issued by an issuer 
covered by one of the exemptions in section 252.76 of the proposed rule 
or that is excluded from the proposed definition of a ``counterparty,'' 
the requirement to recognize an exposure to the collateral issuer would 
have no effect.

    Example: A covered company makes a $1,000 loan to a counterparty 
and that counterparty has pledged as collateral U.S. government 
bonds with an adjusted market value of $1,000. In this case, the 
covered company would not have any net credit exposure to the 
original counterparty because the value of loan and the adjusted 
market value of the U.S. government bonds are equal. Although the 
covered company would have $1,000 of exposure to the U.S. 
government, single-counterparty credit limits would not apply to 
that exposure because U.S. government bonds are excluded from the 
single-counterparty credit limits of the proposed rule.

    Question 21: Should the list of eligible collateral be broadened or 
narrowed? What items should be added or deleted?
    Question 22: Should covered companies have the option of whether to 
reduce their gross credit exposures by recognizing eligible collateral 
in some or all cases? If so, should covered companies nevertheless have 
to recognize gross credit exposures to the issuers of the eligible 
collateral? Are there situations in which full shifting of exposures 
would not be appropriate?
    Question 23: Are the market volatility haircuts in Table 1 to 
section 217.132 of the Board's Regulation Q (12 CFR 217.132) 
appropriate for the valuation of eligible collateral for purposes of 
this rule? Should these haircuts be calibrated differently for purposes 
of this rule?

Eligible Guarantees

    Section 252.74(d) of the proposed rule describes how to reflect 
eligible guarantees in calculations of net credit exposure to a 
counterparty.\61\ Eligible guarantees would be defined as guarantees 
that meet certain conditions, including having been written by an 
eligible protection provider.\62\ The definition of ``eligible 
protection provider'' would be the same as the definition of ``eligible 
guarantor'' in section 217.2 of Regulation Q. As such, an eligible 
protection provider would include a sovereign, the Bank for 
International Settlements, the International Monetary Fund, the 
European Central Bank, the European Commission, a Federal Home Loan 
Bank, the Federal Agricultural Mortgage Corporation (Farmer Mac), a 
multilateral development bank (MDB), a depository institution, a bank 
holding company, a savings and loan holding company, a credit union, a 
foreign bank, or a qualifying central counterparty. An eligible 
protection provider also would include any entity, other than a special 
purpose entity, (i) that at the time the guarantee is issued or anytime 
thereafter, has issued and maintains outstanding an unsecured debt 
security without credit enhancement that is investment grade, (ii) 
whose creditworthiness is not positively correlated with the credit 
risk of the exposures for which it has provided guarantees, and (iii) 
that is not an insurance company engaged predominantly in the business 
of providing credit protection (such as a monoline bond insurer or re-
insurer).
---------------------------------------------------------------------------

    \61\ See proposed rule Sec.  252.74(d).
    \62\ See proposed rule Sec.  252.71(n) for the definition of 
``eligible guarantee'' and for a description of the requirements of 
an eligible guarantee.
---------------------------------------------------------------------------

    In calculating its net credit exposure to the counterparty, a 
covered company would be required to reduce its gross credit exposure 
to the counterparty by the amount of any eligible guarantee from an 
eligible protection provider.\63\ The covered company would then have 
to include the amount of the eligible guarantee when calculating its 
gross credit exposure to the eligible protection provider.\64\ Also, as 
is the case with eligible collateral, a covered company's gross credit 
exposure to an eligible protection provider (with respect to an 
eligible guarantee) could not exceed its gross credit exposure to the 
original counterparty on the credit transaction prior to the 
recognition of the eligible guarantee.\65\ Accordingly, the exposure to 
the eligible protection provider would be capped at the amount of the 
credit exposure to the original counterparty even if the amount of the 
eligible guarantee is larger than the original exposure. A covered 
company would continue to have credit exposure to the original 
counterparty to the extent that the eligible guarantee does not equal 
the full amount of the credit exposure to the original counterparty.
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    \63\ See proposed rule Sec.  252.74(d).
    \64\ See proposed rule Sec. Sec.  252.74(d)(1)-(2).
    \65\ See proposed rule Sec.  252.74(d)(2).

    Example: A covered company makes a $1,000 loan to an 
unaffiliated counterparty and obtains a $700 eligible guarantee on 
the loan from an eligible protection provider.

[[Page 14340]]

The covered company would have gross credit exposure of $700 to the 
protection provider as a result of the eligible guarantee and $300 
net credit exposure to the original counterparty.
    Example: A covered company makes a $1,000 loan to an 
unaffiliated counterparty and obtains a $1,500 eligible guarantee 
from an eligible protection provider. The covered company would have 
$1,000 gross credit exposure to the protection provider (capped at 
the amount of the exposure to the unaffiliated counterparty), but 
the covered company would have no net credit exposure to the 
original counterparty as a result of the eligible guarantee.

    As with eligible collateral, a covered company would be required to 
reduce its gross exposure to a counterparty by the amount of an 
eligible guarantee in order to ensure that concentrations in exposures 
to guarantors are captured by the risk-shifting approach. This 
requirement is meant to limit the ability of a covered company to 
extend loans or other forms of credit to a large number of high risk 
borrowers that are guaranteed by a single guarantor.
    Question 24: Should the definition of eligible guarantee or 
eligible protection provider be expanded or narrowed? Are there any 
additional or alternative requirements the Board should place on 
eligible protection providers to ensure their capacity to perform on 
their guarantee obligations?
    Question 25: Under what circumstances, if any, should covered 
companies have the option of whether (1) to fully shift exposures to 
eligible protection providers in the case of eligible guarantees or (2) 
divide an exposure between the original counterparty and the eligible 
protection provider in some manner? If so, should covered companies 
nevertheless have to recognize gross credit exposures to the issuers of 
the eligible collateral? Are there situations in which full shifting of 
exposures would not be appropriate?

Eligible Credit and Equity Derivative Hedges

    Section 252.74(e) sets forth the proposed treatment of eligible 
credit and equity derivatives in the case where the covered company is 
the protection purchaser.\66\ In the case where a covered company is a 
protection purchaser, such derivatives can be used to mitigate gross 
credit exposure. A covered company may only recognize credit and equity 
derivative hedges that qualify as eligible credit and equity derivative 
hedges for purposes of calculating net credit exposure under the 
proposed rule.\67\ These derivatives would be required to meet certain 
criteria, including having been written by an eligible protection 
provider.\68\ An eligible credit derivative hedge would need to be 
simple in form, meaning a single-name or standard, non-tranched index 
credit derivative. An eligible equity derivative hedge must be in the 
form of an equity-linked total return swap and would not include other, 
more complex forms of equity derivatives, such as purchased equity-
linked options.
---------------------------------------------------------------------------

    \66\ See proposed rule Sec.  252.74(e).
    \67\ By contrast, in section 252.73(a)(12) of the proposed rule, 
where the covered company is the protection provider, any credit or 
equity derivative written by the covered company is included in the 
calculation of the covered company's gross credit exposure to the 
reference obligor.
    \68\ See proposed rule Sec. Sec.  252.71(l) and (m) defining 
``eligible credit derivative'' and ``eligible equity derivative,'' 
respectively. ``Eligible protection provider'' is defined in Sec.  
252.71(o) of the proposed rule. The same types of organizations that 
are eligible protection providers for the purposes of eligible 
guarantees are eligible protection providers for purposes of 
eligible credit and equity derivatives.
---------------------------------------------------------------------------

    The proposed treatment of eligible credit and equity derivatives 
would be similar to the proposed treatment of eligible guarantees. A 
covered company would be required to reduce its gross credit exposure 
to a counterparty by the notional amount of any eligible credit or 
equity derivative hedge that references the counterparty if the covered 
company obtains the derivative from an eligible protection 
provider.\69\ In these circumstances, the covered company generally 
would be required to include the notional amount of the eligible credit 
or equity derivative hedge in calculating its gross credit exposure to 
the eligible protection provider.\70\ As is the case for eligible 
collateral and eligible guarantees, the gross exposure to the eligible 
protection provider would in no event be greater than it was to the 
original counterparty prior to recognition of the eligible credit or 
equity derivative.\71\
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    \69\ See proposed rule Sec.  252.74(e).
    \70\ See proposed rule Sec. Sec.  252.74(e)(1)-(2).
    \71\ See proposed rule Sec.  252.74(e)(2)(i).
---------------------------------------------------------------------------

    For eligible credit and equity derivatives that are used to hedge 
covered positions subject to the Board's market risk rule (12 CFR part 
217, subpart F), the approach would be the same as that explained 
above, except in the case of credit derivatives where the counterparty 
on the hedged transaction is not a financial entity. In this case, a 
covered company would be required to reduce its gross credit exposure 
to the counterparty on the hedged transaction by the notional amount of 
the eligible credit derivative that references the counterparty if the 
covered company obtains the derivative from an eligible protection 
provider. In addition, the covered company would be required to 
recognize a credit exposure to the eligible protection provider that is 
measured using methodologies that the covered company is authorized to 
use under the Board's risk-based capital rules (12 CFR part 217, 
subparts D and E), rather than the notional amount.\72\
---------------------------------------------------------------------------

    \72\ At such time as the Board may consider incorporation of SA-
CCR into the U.S. risk-based capital rules, the Board may consider 
requiring SA-CCR to be used for this purpose as well.

    Example: A covered company holds a $1,000 bond issued by a non-
financial entity (for example, a commercial firm or sovereign) that 
is a covered position subject to the Board's market risk rule, and 
the covered company purchases an eligible credit derivative in a 
notional amount of $800 from Protection Provider X, which is an 
eligible protection provider, to hedge its exposure to the non-
financial entity. The covered company would continue to have $200 in 
net credit exposure to the non-financial entity. In addition, the 
covered company would treat Protection Provider X as a counterparty, 
and would measure its exposure to Protection Provider X using any 
methodology that the covered company is permitted to use under 
Regulation Q to calculate its risk-based capital requirements.
    Example: A covered company holds as a covered position subject 
to the Board's market risk rule a $1,000 bond issued by a financial 
entity (for example, a banking organization), and the covered 
company purchases an eligible credit derivative in a notional amount 
of $800 from Protection Provider X, which is an eligible protection 
provider, to hedge its exposure to the financial entity. The covered 
company would continue to have credit exposure of $200 to the 
underlying financial entity. In addition, the covered company would 
now treat Protection Provider X as a counterparty, and would have an 
$800 credit exposure to Protection Provider X.

    As with eligible collateral and eligible guarantees, a covered 
company would be required to reduce its gross exposure to a 
counterparty by the amount of an eligible equity or credit derivative, 
and to recognize an exposure to an eligible protection provider, in 
order to ensure that concentrations in exposures to eligible protection 
providers are captured in the regime. However, many commenters on the 
2011 proposed rule argued that requiring a full notional shifting of 
risk in the context of credit derivatives was overly conservative, 
since a covered company would only experience losses in cases where 
both the original counterparty and the protection provider default. As 
such, these commenters recommended allowing covered companies to 
measure exposures from credit derivative hedges using the methodologies 
permitted for derivatives more generally.

[[Page 14341]]

    The proposed rule includes this modification for credit derivatives 
that are used to hedge covered positions subject to the market risk 
rule, where the credit derivative is used to hedge an exposure to an 
entity that is not a financial entity. The proposed rule would require 
full notional risk-shifting for credit derivatives used to hedge 
exposures to financial entities because most protection providers are 
financial entities, and when both the protection provider and the 
reference entity are financial entities, the probability of correlated 
defaults generally is substantially greater than when protection is 
sold on non-financial reference entities.
    In cases where a covered company is required to shift its credit 
exposure from the counterparty to an eligible protection provider 
pursuant to section 252.74(e), the covered company would be permitted 
to exclude the relevant equity or credit derivative when calculating 
its gross exposure to the eligible protection provider under sections 
252.74(a)(10) and 252.94(a)(11). This is to avoid requiring covered 
companies to double count the same exposures.
    Question 26: Should the proposed definitions of eligible credit 
derivative or eligible equity derivative be expanded or narrowed? In 
particular, are there more complex forms of derivatives that should be 
eligible hedges?
    Question 27: Under what circumstances, if any, should covered 
companies be permitted not to recognize an eligible credit or equity 
derivative hedge, or to apportion the exposure between the original 
counterparty and the eligible protection provider?
    Question 28: To the extent that covered companies will be required 
to shift exposures to protection providers in the case of eligible 
credit or equity derivative hedges, would the proposed approach result 
in recognition of the proper amount of exposure by a covered company to 
an eligible protection provider? If not, what modifications should the 
Board consider?

Other Eligible Hedges

    Under the proposed rule, a covered company would be allowed to 
reduce its credit exposure to a counterparty by the face amount of a 
short sale of the counterparty's debt or equity securities, provided 
that the instrument in which the covered company has a short position 
is junior to, or pari passu with, the instrument in which the covered 
company has the long position.\73\ This restriction on the set of short 
positions permitted to offset long positions would help to ensure that 
any loss arising from the covered company's long exposure is offset by 
a gain in the covered company's short exposure.
---------------------------------------------------------------------------

    \73\ See proposed rule Sec.  252.74(f).

    Example: A covered company holds $100 of bonds issued by Company 
X. If the covered company sells short $100 of equity shares issued 
by Company X, the covered company would not have any net credit 
exposure to Company X. Similarly, the covered company would not have 
any net credit exposure to Company X if it sells short $100 of 
Company X's debt obligations, provided that those obligations are 
junior to, or pari passu with, the Company X bonds that the covered 
---------------------------------------------------------------------------
company holds.

    Question 29: Should the Board permit short positions to offset long 
positions only if the short position is in an instrument that is junior 
to, or pari passu with, the instrument that gives rise to the firm's 
long exposure?
    Question 30: Should the Board place any additional requirements, 
including maturity match requirements, on short positions that are 
eligible to offset long positions? To the extent that there is a 
maturity mismatch between the positions, should the value of the short 
position be subject to application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q?

Treatment of Maturity Mismatches

    The above discussion of credit risk mitigation techniques 
(collateral, guarantees, equity and credit derivatives, and offsetting 
short positions) assumes that the residual maturity of the credit risk 
mitigant is greater than or equal to that of the underlying exposure. 
If the residual maturity of the credit risk mitigant is less than that 
of the underlying exposure, the credit risk mitigant would only be 
recognized under the proposed rule if the credit risk mitigant's 
original maturity is equal to or greater than one year and its residual 
maturity is not less than three months from the current date. In that 
case, the reduction in the underlying exposure would be adjusted based 
on the same approach that is used in the Board's Regulation Q (12 CFR 
part 217) to address a maturity mismatch.\74\
---------------------------------------------------------------------------

    \74\ A credit risk mitigant would be adjusted using the formula 
Pa = P x (t-0.25)/(T-0.25), where Pa is the value of the credit 
protection adjusted for maturity mismatch; P is the credit 
protection adjusted for any haircuts; t is the lesser of (1) T or 
(2) the residual maturity of the credit protection, expressed in 
years; and T is the lesser of (1) 5 or (2) the residual maturity of 
the exposure, expressed in years. See 12 CFR 217.36(d).
---------------------------------------------------------------------------

    With respect to the amount of exposure that a covered company would 
need to recognize to the issuer of eligible collateral or to an 
eligible protection provider in cases of maturity mismatch, such amount 
generally would be equal to the amount by which the relevant form of 
credit risk mitigation has reduced the exposure to the original 
counterparty. However, in the case of credit and equity derivatives 
used to hedge exposures subject to the Board's market risk rule (12 CFR 
217, subpart F) that are to counterparties that are non-financial 
entities, the covered company would be permitted to recognize a credit 
exposure with regard to the eligible protection provider measured using 
methodologies that the covered company is authorized to use under the 
Board's risk-based capital rules, including CEM for all covered 
companies and approaches that rely on internal models for companies 
subject to the Board's advanced approaches risk-based capital rules (12 
CFR 217, subparts D and E).

    Example: A covered company makes a loan to a counterparty and 
hedges the resulting exposure by obtaining an eligible guarantee 
from an eligible protection provider. If the residual maturity of 
the guarantee is less than that of the loan, the covered company 
would adjust the value assigned to the guarantee using the formula 
in the Board's Regulation Q (12 CFR part 217). The covered company 
would then reduce its gross credit exposure to the underlying 
counterparty by the adjusted value of the guarantee and would set 
its exposure to the eligible guarantor equal to the adjusted value 
of the guarantee.
    Example: A covered company holds bonds issued by a non-financial 
entity that are subject to the Board's market risk rule, and hedges 
the exposure using an eligible credit derivative obtained from an 
eligible protection provider. If the residual maturity of the 
eligible credit derivative is less than that of the bonds, the 
covered company would reduce its exposure to the issuer of the bonds 
by the adjusted value of the credit derivative using the formula in 
the Board's Regulation Q. The covered company would measure its 
exposure to the eligible protection provider using methodologies 
that the covered company is permitted to use under the Board's risk-
based capital rules (12 CFR part 217, subparts D and E), without any 
specific adjustment to reflect the maturity mismatch between the 
bonds and the credit derivative.

    Question 31: The Board invites comment on the proposed treatment of 
maturity mismatches in the context of credit risk mitigation.

Unused Credit Lines

    Section 252.74(g) of the proposed rule addresses the treatment of 
any unused portion of certain extensions of credit. In computing its 
net credit exposure to a counterparty for a credit line or revolving 
credit facility, a covered company would be permitted to reduce

[[Page 14342]]

its gross credit exposure by the amount of the unused portion of the 
credit extension to the extent that the covered company does not have 
any legal obligation to advance additional funds under the facility 
until the counterparty provides collateral that qualifies under the 
credit line or revolving credit facility equal to or greater than the 
entire used portion of the facility.\75\ To qualify for this reduction, 
the contract governing the extension of credit would be required to 
specify that any used portion of the credit extension must be fully 
secured at all times by collateral that is either (i) cash; (ii) 
obligations of the United States or its agencies; (iii) obligations 
directly and fully guaranteed as to principal and interest by, the 
Federal National Mortgage Association or the Federal Home Loan Mortgage 
Corporation, but only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency; or (iv) any 
additional obligations issued by a U.S. government sponsored entity, as 
determined by the Board.\76\
---------------------------------------------------------------------------

    \75\ See proposed rule Sec.  252.74(g).
    \76\ Id.
---------------------------------------------------------------------------

    Question 32: What alternative approaches should the Board consider 
concerning the unused portion of certain credit facilities?

Credit Transactions Involving Exempt and Excluded Persons

    Section 252.74(h) \77\ provides that, if a covered company has 
reduced its credit exposure to a counterparty that would be exempt 
under the proposed rule by obtaining eligible collateral from that 
entity, or by obtaining an eligible guarantee or an eligible credit or 
equity derivative from an eligible protection provider, the covered 
company must recognize an exposure to the collateral issuer or eligible 
protection provider to the same extent as if the underlying exposure 
were to an entity that is not exempt. Similarly, if a covered company 
has reduced its exposure to an entity that is excluded from the 
definition of a ``counterparty'' (e.g., the U.S. government or a 
foreign sovereign entity that receives a zero percent risk weight under 
Regulation Q) by obtaining eligible collateral from that entity, or by 
obtaining an eligible guarantee or an eligible credit or equity 
derivative from an eligible protection provider, the covered company 
must recognize an exposure to the collateral issuer or eligible 
protection provider to the same extent as if the underlying exposure 
were to an entity that is not excluded from the definition of a 
counterparty.
---------------------------------------------------------------------------

    \77\ See proposed rule Sec.  252.74(h).

    Example: A covered company has purchased a credit derivative 
from an eligible protection provider to hedge the credit risk on a 
portfolio of U.S. government bonds. The covered company would need 
to recognize an exposure to the credit protection provider equal to 
the full notional of the credit derivative (if the bonds are subject 
to the Board's risk-based capital rules in 12 CFR part 217, subparts 
D and E) or to the counterparty credit risk measurements obtained by 
using methodologies that the covered company is permitted to use 
under the market risk capital rules (if the bonds are subject to the 
---------------------------------------------------------------------------
Board's market risk rule in 12 CFR part 217, subpart F).

    Question 33: If a covered company has an exempted credit exposure 
but either (1) receives non-exempt eligible collateral in support of 
the exempted transaction or (2) obtains a non-exempt eligible guarantee 
or eligible credit or equity derivative referencing the exempted credit 
exposure from an eligible protection provider, should the covered 
company be required to recognize an exposure to the issuer(s) of the 
collateral or eligible protection provider even though the original 
credit exposure was exempt? Should the Board consider any alternative 
treatment in such situations?
Exposures to Funds and Securitizations
    Special considerations arise in connection with measuring credit 
exposure of a covered company to a securitization fund, investment fund 
or other special purpose vehicle (collectively, SPVs). In some cases, a 
covered company's failure to recognize an exposure to the issuers of 
the underlying assets held by an SPV may understate the covered 
company's credit exposure to those issuers. In other cases, a covered 
company's credit exposure to the issuers of the underlying assets held 
by an SPV may be insignificant and, in such cases, requiring a covered 
company to recognize an exposure to each issuer of underlying assets 
for every SPV in which a covered company invests could be unduly 
burdensome.
    Under the proposed rule, covered companies that have $250 billion 
or more in total consolidated assets or $10 billion or more in total 
on-balance-sheet foreign exposures would be required to analyze their 
credit exposure to the issuers of the underlying assets in an SPV in 
which the covered company invests or to which the covered company 
otherwise has credit exposure. If a covered company cannot demonstrate 
that its exposure to the issuer of each underlying asset held by an SPV 
is less than 0.25 percent of the covered company's tier 1 capital 
(considering only exposures that arise from the SPV), the covered 
company would be required to apply a ``look-through approach'' and 
recognize an exposure to each issuer of the assets held by the SPV.\78\ 
Conversely, if a covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures can demonstrate that its exposure to each underlying 
asset in an SPV is less than 0.25 percent of the covered company's tier 
1 capital (considering only exposures that arise from the SPV), the 
covered company would be allowed to recognize an exposure solely to the 
SPV and not to the underlying assets.\79\ The proposed 0.25 percent 
threshold for requiring the use of the look-through approach is 
intended to strike a balance between the goals of limiting a covered 
company's exposures to underlying assets in an SPV and avoiding 
excessive burden. If a covered company with $250 billion or more in 
total consolidated assets or $10 billion or more in total on-balance-
sheet foreign exposures would be required to apply the look-through 
approach, but is unable to identify an issuer of assets underlying an 
SPV, the covered company would be required to attribute the exposure to 
a single ``unknown counterparty.'' The covered company would then be 
required to aggregate all exposures to an unknown counterparty as if 
they related to a single counterparty.
---------------------------------------------------------------------------

    \78\ See proposed rule Sec.  252.75. The calculation of a 
covered company's exposure to an issuer of assets held by an SPV is 
discussed in more detail in the following paragraphs.
    \79\ A covered company's exposure to each underlying asset in an 
SPV necessarily would be less than 0.25 percent of the covered 
company's eligible capital base where the covered company's entire 
investment in the SPV is less than 0.25 percent of the covered 
company's eligible capital base.
---------------------------------------------------------------------------

    The application of the look-through approach would depend on the 
nature of the investment of the covered company in the SPV. Where all 
investors in an SPV are pari passu, the covered company would calculate 
its exposure to an issuer of assets held by the SPV as an amount equal 
to the covered company's pro rata share in the SPV multiplied by the 
value of the SPV's underlying assets issued by that issuer.

    Example: An SPV holds $10 of bonds issued by Company A and $20 
of bonds issued by Company B. Assuming that all investors in the SPV 
are pari passu and that a covered company's pro rata share in the 
SPV is 50 percent, a covered company (with $250 billion or more in 
total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures) would need

[[Page 14343]]

to recognize a $5 exposure to Company A (i.e., 50 percent of $10) 
and a $10 exposure to Company B (i.e., 50 percent of $20) if the 
look-through approach is required.

    If all investors in an SPV are not pari passu, a covered company 
that is required to use the look-through approach would measure its 
exposure to an issuer of assets held by the SPV for each tranche in the 
SPV in which the covered company invests. The covered company would do 
this using a two-step process. First, the covered company would assume 
that the total exposure to an issuer of assets held by the SPV among 
all investors in a given SPV tranche is equal to the lesser of the 
value of the tranche and the value of the assets issued by the issuer 
that are held by the SPV. Second, the covered company would multiply 
this exposure amount by the percentage of the SPV tranche that the 
covered company holds.

    Example: An SPV holds $10 of bonds issued by Company A. The SPV 
has issued $4 of junior notes and $6 of senior notes to the SPV's 
investors. A covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures holds 50 percent of the junior notes and 50 
percent of the senior notes. With respect to the junior tranche of 
the SPV, the lesser of the value of the tranche (i.e., $4) and the 
value of the underlying assets issued by Company A (i.e., $10) is 
$4. With respect to the senior tranche of the SPV, the lesser of the 
value of the tranche (i.e., $6) and the value of the underlying 
assets issued by Company A (i.e., $10) is $6. Because the covered 
company has $250 billion or more in total consolidated assets or $10 
billion or more in total on-balance-sheet foreign exposures and its 
pro rata share of each tranche is 50 percent, it would need to 
recognize $2 of exposure to Company A because of its investment in 
the junior tranche (i.e., 50 percent of $4), and $3 of exposure to 
Company A because of its investment in the senior tranche (i.e., 50 
percent of $6), assuming the look-through approach is required.

    In addition, a covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures would be required to identify third parties whose 
failure or distress would likely result in a loss in the value of the 
covered company's investment in the SPV. For example, the value of an 
investment by the covered company in an SPV might be reliant on various 
forms of credit support provided by a financial institution to the SPV. 
The failure or distress of the credit support provider would then lead 
to loss in the value of the investment of the covered company in the 
SPV. Other examples of third parties whose failure or distress could 
potentially lead to a loss in the value of the covered company's 
investment in the SPV are originators of assets held by the SPV, 
liquidity providers to the SPV, and (potentially) fund managers. In 
such cases, the covered company would be required to recognize an 
exposure to the relevant third party that is equal to the value of the 
covered company's investment in the SPV. This requirement would be in 
addition to the requirements described above to recognize an exposure 
to the SPV and, if needed, to the issuers of assets held by the SPV.
    These proposed requirements for covered companies with $250 billion 
or more in total consolidated assets or $10 billion or more in total 
on-balance-sheet foreign exposures would be appropriate in light of the 
larger systemic footprint of those firms, and is consistent with the 
direction in section 165(a)(1)(B) of the Dodd-Frank Act to tailor 
enhanced prudential standards based on factors such as the nature, 
scope, size, scale, concentration, interconnectedness, and mix of the 
activities of the company to which the standards apply.\80\
---------------------------------------------------------------------------

    \80\ 12 U.S.C. 5365(a)(1)(B).
---------------------------------------------------------------------------

    Question 34: Is the proposed treatment of a covered company that 
has less than $250 billion or more in total consolidated assets and 
less than $10 billion or more in total on-balance-sheet foreign 
exposures with respect to its exposures related to SPVs appropriate? 
What alternatives should the Board consider?
    Question 35: Is the proposed treatment of a covered company with 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance-sheet foreign exposures with respect to its 
exposures related to SPVs appropriate? Are there situations in which 
the proposed treatment would result in recognition of inappropriate 
amounts of credit exposure concerning an SPV? What alternative 
approaches should the Board consider?
    Question 36: Is the proposed treatment of exposures related to SPVs 
sufficiently clear? Would further clarification or simplification be 
appropriate? What modifications should the Board consider? For example, 
should the Board modify the approach such that a covered company would 
only be required to use the look-through approach with respect to 
particular underlying exposures rather than all underlying exposures in 
the event that the covered company is able to demonstrate that its 
credit exposure to some of the underlying assets in an SPV is less than 
0.25 percent of the covered company's tier 1 capital but not able to 
make this demonstration with respect to all the underlying assets?
Exemptions
    Under the proposal, single-counterparty credit limits would not 
apply to exposures to the U.S. government or a foreign sovereign entity 
that receives a zero percent risk weight under Regulation Q because 
such entities are not included in the definition of a ``counterparty.'' 
Section 252.77 of the proposed rule sets forth additional exemptions 
from the single-counterparty credit limits.\81\ Section 165(e)(6) of 
the Dodd-Frank Act states that the Board may, by regulation or order, 
exempt transactions, in whole or in part, from the definition of the 
term ``credit exposure'' for purposes of this subsection, if the Board 
finds that the exemption is in the public interest and is consistent 
with the purposes of this subsection.\82\
---------------------------------------------------------------------------

    \81\ See proposed rule Sec.  252.77.
    \82\ See 12 U.S.C. 5365(e)(6).
---------------------------------------------------------------------------

    The first exemption from the proposed rule would be for direct 
claims on, and the portions of claims that are directly and fully 
guaranteed as to principal and interest by, the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation, 
while these entities are operating under the conservatorship or 
receivership of the Federal Housing Finance Agency.\83\ This proposed 
exemption reflects a policy decision that credit exposures to these 
government-sponsored entities should not be subject to a regulatory 
limit for so long as the entities are in the conservatorship or 
receivership of the U.S. government. This approach is consistent with 
the approach that the Board used in its risk retention rules.\84\ As 
determined by the Board, obligations issued by another U.S. government 
sponsored entity would also be exempt. The Board requests comment on 
whether these exemptions are appropriate.
---------------------------------------------------------------------------

    \83\ See proposed rule Sec.  252.77(a)(1).
    \84\ See 12 CFR 244.8.
---------------------------------------------------------------------------

    The second exemption from the proposed rule would be for intraday 
credit exposure to a counterparty.\85\ This exemption would help 
minimize the impact of the rule on the payment and settlement of 
financial transactions.
---------------------------------------------------------------------------

    \85\ See proposed rule Sec.  252.77(a)(2).
---------------------------------------------------------------------------

    The third exemption from the proposed rule would be for trade 
exposures to a central counterparty that meet the definition of a 
qualified central counterparty under Regulation Q (QCCPs).\86\ These 
exposures would

[[Page 14344]]

include potential future exposure arising from transactions cleared by 
a QCCP and pre-funded default fund contributions.\87\ The proposed rule 
would exempt these exposures to QCCPs from single-counterparty credit 
limits because of the concern that application of single-counterparty 
credit limits to these exposures would require firms to spread activity 
across a greater number of CCPs, which could lead to a reduction in 
multilateral netting benefits.\88\
---------------------------------------------------------------------------

    \86\ See proposed rule Sec.  252.71(y); see also 12 CFR 217.2.
    \87\ As initial margin and excess variation margin posted to the 
QCCP and held in a segregated account by a third party custodian are 
not subject to counterparty risk, these amounts would not be 
considered credit exposures under the proposed rule.
    \88\ See proposed rule Sec.  252.77(a)(3).
---------------------------------------------------------------------------

    The fourth exemption category would implement section 165(e)(6) of 
the Dodd-Frank Act and provide a catch-all category to exempt any 
transaction which the Board determines to be in the public interest and 
consistent with the purposes of section 165(e).\89\
---------------------------------------------------------------------------

    \89\ See 12 U.S.C. 5365(e)(6); proposed rule Sec.  252.76(a)(4).
---------------------------------------------------------------------------

    Section 252.77(b) of the proposed rule would implement section 
165(e)(6) of the Dodd-Frank Act, which provides a statutory exemption 
for credit exposures to the Federal Home Loan Banks.
    Question 37: Should all trade exposures to QCCPs be exempt from the 
proposed rules? Is the definition of ``QCCP'' sufficiently clear? 
Should the Board consider exempting any different or additional 
exposures to QCCPs? Would additional clarification on these issues be 
appropriate?
    Question 38: Should the Board exempt any additional credit 
exposures from the limitations of the proposed rule? If so, please 
explain why.
Compliance
    Under section 252.78(a) of the proposed rule, covered companies 
with less than $250 billion in total consolidated assets and less than 
$10 billion in total on-balance-sheet foreign exposures would be 
required to demonstrate compliance with the requirements of the 
proposed rule as of the end of each calendar quarter.\90\ These 
companies would, however, need to have systems in place that would 
allow them to calculate compliance on a daily basis and would be 
required to calculate compliance on a more frequent basis than 
quarterly if directed to do so by the Board. A covered company with 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance-sheet foreign exposures would be required to 
comply with the requirements of the proposed rule on a daily basis as 
of the end of each business day. Such covered companies also would be 
required to submit a monthly compliance report to the Board.\91\
---------------------------------------------------------------------------

    \90\ See proposed rule Sec.  252.78(a).
    \91\ See proposed rule Sec.  252.78(a).
---------------------------------------------------------------------------

    Section 252.78(c) of the proposed rule would address the 
consequences if a covered company fails to comply with the credit 
exposure limits.\92\ This section states that if a covered company is 
not in compliance with respect to a counterparty due to a decrease in 
the covered company's capital, the merger of a covered company with 
another covered company, or the merger of two unaffiliated 
counterparties of the covered company, the covered company would not be 
subject to enforcement actions with respect to such noncompliance for a 
period of 90 days (or such shorter or longer period determined by the 
Board to be appropriate to maintain the safety and soundness of the 
covered company or financial stability), so long as the company uses 
reasonable efforts to return to compliance with the proposed rule 
during this period. The covered company would be prohibited from 
engaging in any additional credit transactions with such a counterparty 
in contravention of this rule during the non-compliance period, except 
in cases where the Board determines that such additional credit 
transactions are necessary or appropriate to preserve the safety and 
soundness of the covered company or financial stability.\93\ In 
granting approval for any such special temporary exceptions, the Board 
may impose supervisory oversight and reporting measures that it 
determines are appropriate to monitor compliance with the foregoing 
standards.\94\
---------------------------------------------------------------------------

    \92\ See proposed rule Sec.  252.78(c).
    \93\ Id.
    \94\ See proposed rule Sec.  252.78(d).
---------------------------------------------------------------------------

    The Board plans to develop reporting forms for covered companies to 
use to report credit exposures to their counterparties as those credit 
exposures would be measured under section 165(e). In addition, section 
165(d)(2) of the Dodd-Frank Act directs the Board to require bank 
holding companies with $50 billion or more in total consolidated assets 
and nonbank financial companies that are supervised by the Board to 
prepare period exposure reports.\95\ The Board anticipates that 
165(d)(2) credit exposure reporting obligations will be informed by the 
requirements of the 165(e) framework and by any forms that are 
developed for covered companies to use in reporting their 165(e) 
exposures.
---------------------------------------------------------------------------

    \95\ 12 U.S.C. 5365(d)(2).
---------------------------------------------------------------------------

    Question 39: Should the rule provide a cure period for covered 
companies that fall out of compliance? Under what circumstances should 
such a cure period be provided, and how long should such a period be?
    Question 40: If a cure period is provided, would it be appropriate 
to generally prohibit additional credit transactions with the affected 
counterparty during the cure period? Are there additional situations in 
which additional credit transactions with the affected counterparty 
would be appropriate? What additional modifications or clarifications 
should the Board consider with respect to any cure period?
Timing
    Under the proposed rule, covered companies with total consolidated 
assets of less than $250 billion in total consolidated assets and less 
than $10 billion or more in total on-balance-sheet foreign exposures 
would be required to comply initially with the proposed rules two years 
from the effective date of the proposed rules, unless that time is 
extended by the Board in writing.\96\ Covered companies that have $250 
billion or more in total consolidated assets or $10 billion or more in 
total on-balance-sheet foreign exposures would be required to comply 
initially with the proposed rules one year from the effective date of 
the rule, unless that time is extended by the Board in writing.\97\
---------------------------------------------------------------------------

    \96\ See proposed rule Sec.  252.70(g)(1).
    \97\ See proposed rule Sec.  252.70(g)(2).
---------------------------------------------------------------------------

    Any company that becomes a covered company after the effective date 
of the rule would be required to comply with the requirements of the 
rule beginning on the first day of the fifth calendar quarter after it 
becomes a covered company, unless that time is accelerated or extended 
by the Board in writing.\98\
---------------------------------------------------------------------------

    \98\ See proposed rule Sec.  252.70(h).
---------------------------------------------------------------------------

    Question 41: Should the Board consider a longer or shorter phase-in 
period for all or a subset of covered companies? Is a shorter phase-in 
period for covered companies with $250 billion or more in total 
consolidated exposures, or $10 billion or more in total on-balance-
sheet foreign exposures, compared to firms below these thresholds, 
appropriate?

Proposed Rule for Foreign Banking Organizations

Background

    In February 2014, the Board adopted a final rule establishing 
enhanced

[[Page 14345]]

prudential standards for foreign banking organizations with U.S. 
banking operations and total consolidated assets of $50 billion or 
more.\99\ Under that rule, a foreign banking organization with U.S. 
non-branch assets of $50 billion or more will be required to form an 
intermediate holding company (U.S. intermediate holding company) to 
hold its interests in U.S. bank and nonbank subsidiaries.\100\ A 
foreign banking organization's U.S. intermediate holding company will 
be subject to enhanced prudential standards on a consolidated basis, 
including risk-based and leverage capital requirements, liquidity 
requirements, and risk management standards. Certain enhanced 
prudential standards also will apply to a foreign banking 
organization's ``combined U.S. operations,'' which would include a 
foreign banking organization's U.S. branches and agencies as well as 
U.S. subsidiaries.
---------------------------------------------------------------------------

    \99\ See 79 FR 17240 (Mar. 27, 2014).
    \100\ A foreign banking organization's intermediate holding 
company is not required to hold the foreign banking organization's 
interest in any company held under section 2(h)(2) of the Bank 
Holding Company Act, 12 U.S.C. 1841(h)(2).
---------------------------------------------------------------------------

    Like the enhanced prudential standards for foreign banking 
organizations that the Board previously has adopted, the single-
counterparty credit limits in this proposed rule would apply to a 
foreign banking organization with U.S. banking operations and $50 
billion or more in total consolidated assets, and to the U.S. 
intermediate holding company of such a foreign banking organization.

Overview of the Proposed Rule for Foreign Banking Organizations

    Similar to the proposed rule to implement section 165(e) of the 
Dodd-Frank Act for domestic companies, the aggregate net credit 
exposure of a foreign banking organization or U.S. intermediate holding 
company with total consolidated assets of $50 billion or more (each a 
covered entity) to a single counterparty would be subject to one of 
three increasingly stringent credit exposure limits. Credit exposure 
limits as applied to foreign banking organizations, as opposed to 
intermediate holding companies, would only apply with respect to credit 
exposures of that foreign banking organization's combined U.S. 
operations (i.e., any U.S. intermediate holding company, including its 
subsidiaries, plus any U.S. branches or agencies of the foreign banking 
organization), although the foreign banking organization's total 
consolidated assets on a worldwide basis would determine whether the 
credit exposure limits apply.
    The first category of limits would apply to covered entities that 
have less than $250 billion in total consolidated assets and less than 
$10 billion in on-balance-sheet foreign exposures. Covered entities 
that have less than $250 billion in total consolidated assets and less 
than $10 billion in on-balance sheet foreign exposures would be 
prohibited from having aggregate net credit exposure to an unaffiliated 
counterparty in excess of 25 percent of the covered entity's total 
capital stock and surplus, defined under the rule as (1) in the case of 
a U.S. intermediate holding company, the sum of the U.S. intermediate 
holding company's total regulatory capital, as calculated under the 
risk-based capital adequacy guidelines applicable to that U.S. 
intermediate holding company, plus the balance of the ALLL of the U.S. 
intermediate holding company not included in tier 2 capital under the 
capital adequacy guidelines, and (2) in the case of a foreign banking 
organization, the total regulatory capital of the foreign banking 
organization on a consolidated basis, as determined in accordance with 
section 252.171(d) of the proposed rule.\101\ The different definition 
of ``capital stock and surplus'' with respect to a foreign banking 
organization reflects differences in international accounting 
standards.
---------------------------------------------------------------------------

    \101\ See 12 CFR part 252, subpart L.
---------------------------------------------------------------------------

    The second category of exposure limits would prohibit any covered 
entity with $250 billion or more in total consolidated assets or $10 
billion or more in total on-balance-sheet foreign exposures, but less 
than $500 billion in total consolidated assets, from having aggregate 
net credit exposure to an unaffiliated counterparty in excess of 25 
percent of the covered entity's tier 1 capital. For the same reasons as 
described above with respect to the portion of the proposed rule 
applicable to covered companies, the proposed single-counterparty 
credit limits applicable to a covered entity, including both a foreign 
banking organization and any U.S. intermediate holding company, with 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance-sheet foreign exposures would be based on tier 
1 capital.
    The third category of exposure limits would prohibit any covered 
entity with total consolidated assets of $500 billion or more (major 
foreign banking organization or major U.S. intermediate holding 
company) from having aggregate net credit exposure in excess of 15 
percent of the tier 1 capital of the major foreign banking organization 
or major U.S. intermediate holding company to a major counterparty, and 
25 percent of the tier 1 capital of the major foreign banking 
organization or major U.S. intermediate holding company to any other 
counterparty. A ``major counterparty'' would be defined as a global 
systemically important banking organization or a nonbank financial 
company supervised by the Board. This framework would be consistent 
with the requirement in section 165(a)(1)(B) of the Dodd-Frank Act that 
the enhanced standards established by the Board under section 165 
increase in stringency based on factors such as the nature, scope, 
size, scale, concentration, interconnectedness, and mix of the 
activities of the company.\102\ The credit exposure limits are 
summarized in Table 2.
---------------------------------------------------------------------------

    \102\ 12 U.S.C. 5323, 5365(e).

    Table 2--Single-Counterparty Credit Limits Applicable to Covered
                                Entities
------------------------------------------------------------------------
                                            Applicable credit exposure
      Category of covered entities                    limit
------------------------------------------------------------------------
U.S. intermediate holding companies or   Aggregate net credit exposure
 foreign banking organizations with       of a U.S. intermediate holding
 less than $250 billion in total          company cannot exceed 25
 consolidated assets and less than $10    percent of the U.S.
 billion in on-balance-sheet foreign      intermediate holding company's
 exposures..                              total regulatory capital plus
                                          the balance of its ALLL not
                                          included in tier 2 capital
                                          under the capital adequacy
                                          guidelines in 12 CFR part 252.
                                         Aggregate net credit exposure
                                          of a foreign banking
                                          organization, with respect to
                                          its U.S. combined operations,
                                          to a counterparty cannot
                                          exceed 25 percent of the
                                          foreign banking organization's
                                          total regulatory capital on a
                                          consolidated basis.

[[Page 14346]]

 
U.S. intermediate holding companies or   Aggregate net credit exposure
 foreign banking organizations with       of a U.S. intermediate holding
 $250 billion or more in total            company to a counterparty
 consolidated assets or $10 billion or    cannot exceed 25 percent of
 more in on-balance-sheet foreign         the U.S. intermediate holding
 exposures..                              company's tier 1 capital.
                                         Aggregate net credit exposure
                                          of a foreign banking
                                          organization, with respect to
                                          its U.S. combined operations,
                                          to a counterparty cannot
                                          exceed 25 percent of the
                                          foreign banking organization's
                                          worldwide tier 1 capital.
Major U.S. intermediate holding          Aggregate net credit exposure
 companies and major foreign banking      of a major U.S. intermediate
 organizations..                          holding company or, with
                                          respect to its combined U.S.
                                          operations, of a foreign
                                          banking organization to a
                                          major counterparty cannot
                                          exceed 15 percent of the
                                          covered entity's tier 1
                                          capital.
                                         Aggregate net credit exposure
                                          of a major U.S. intermediate
                                          holding company or, with
                                          respect to its combined U.S.
                                          operations, of a foreign
                                          banking organization to other
                                          counterparties cannot exceed
                                          25 percent of the covered
                                          entity's tier 1 capital.
------------------------------------------------------------------------

    Question 42: Should the Board apply these single-counterparty 
credit limits to all foreign banking organizations that have $50 
billion or more in total consolidated assets, regardless of the size of 
these organizations' combined operations in the United States? Is this 
application appropriate?
    The more stringent limit for major U.S. intermediate holding 
companies and, with respect to their combined U.S. operations, major 
foreign banking organizations would be consistent with the Board's 
discretion under the Dodd-Frank Act to impose such lower single-
counterparty credit limits as the Board may determine by regulation to 
be necessary to mitigate risks to the financial stability of the United 
States, as well as with the standard in section 165(a)(1)(B) of the 
Dodd-Frank Act that the Board establish enhanced prudential standards 
that increase in stringency based on the systemic footprint of the 
firms to which they apply. The rationale for proposing to apply a 15 
percent limit to such exposures is set out in more detail in the 
discussion in the SUPPLEMENTARY INFORMATION concerning the credit 
exposure limits of the domestic proposed rule.
    The proposed approach to identifying a major U.S. intermediate 
holding company and major foreign banking organization is based only on 
size, and the Board recognizes that size is only a rough proxy for the 
systemic footprint of a company. By contrast, the domestic proposed 
rule would only subject a U.S. banking organization to a 15 percent 
limit on its exposures to major counterparties if that U.S. banking 
organization has been identified as a global systemically important 
banking organization under Method 1 of the Board's G-SIB surcharge 
rule.\103\ These determinations are based on multiple factors, 
including size, complexity, interconnectedness, cross-border exposure, 
and substitutability. Imposing stricter limits on exposures of the 
combined U.S. operations of major foreign banking organizations or 
major U.S. intermediate holding companies to their respective major 
counterparties based on a simple asset threshold may not take into 
account nuances that might be captured by other approaches.
---------------------------------------------------------------------------

    \103\ 12 CFR 217.402.
---------------------------------------------------------------------------

    Question 43: Should the Board adopt a different approach in 
determining which foreign banking organizations, with respect to their 
combined U.S. operations, and U.S. intermediate holding companies 
should be treated as major foreign banking organizations or major U.S. 
intermediate holding companies?
    Question 44: Should the Board adopt a different approach to the 
definition of a ``major counterparty''?
    In determining whether a U.S. intermediate holding company complies 
with these limits, exposures of the U.S. intermediate holding company 
itself and its subsidiaries would need to be taken into account. 
Exposures of a foreign banking organization's combined U.S. operations 
would include exposures of any branch or agency of the foreign banking 
organization; exposures of the U.S. subsidiaries of the foreign banking 
organization, including any U.S. intermediate holding company; and any 
subsidiaries of such subsidiaries (other than any companies held under 
section 2(h)(2) of the Bank Holding Company Act of 1956).\104\ 
``Subsidiary'' would be defined in the same manner as under the 
proposed requirements for domestic covered companies: any company that 
a parent company directly or indirectly controls for purposes of the 
Bank Holding Company Act of 1956.\105\ For purposes of the proposed 
rule applicable to covered entities, the definitions of subsidiary, 
counterparty, and related terms and the economic interdependence, 
control relationship, and attribution requirements would be the same as 
under the portions of the proposed rule applicable to covered 
companies.
---------------------------------------------------------------------------

    \104\ 12 U.S.C. 1841(h)(2).
    \105\ 12 U.S.C. 1841 et seq.; see proposed rule Sec.  
252.171(dd).
---------------------------------------------------------------------------

    Although the major components of the proposed single-counterparty 
credit limits for foreign banking organizations would be the same as 
the proposed requirements for domestic covered companies, there are 
also some differences between the proposed rules. For example, as 
discussed in more detail below, the proposed single-counterparty credit 
limits would not apply to exposures of a U.S. intermediate holding 
company or a foreign banking organization's combined U.S. operations to 
the foreign banking organization's home country sovereign, regardless 
of the risk weight assigned to that sovereign under the Board's 
Regulation Q (12 CFR part 217).
    Question 45: As noted, the proposed rule would apply the single-
counterparty credit limits to covered entities on a consolidated basis 
and could, therefore, impact the level of credit exposures of 
subsidiaries of these covered entities, including depository 
institutions. Is application on a consolidated basis appropriate?
    Question 46: What challenges, if any, would a foreign banking 
organization face in implementing the requirement that all subsidiaries 
of the U.S. intermediate holding company and the combined U.S. 
operations be subject to the proposed single-counterparty credit limit?

[[Page 14347]]

    Question 47: What other alternatives to the proposed capital bases 
should the Board consider in applying single-counterparty credit limits 
to U.S. intermediate holding companies and the combined U.S. operations 
of foreign banking organizations?
    Question 48: Should tier 1 capital be used as the capital base in 
applying single-counterparty credit limits to U.S. intermediate holding 
companies and the combined U.S. operations of foreign banking 
organizations with $250 billion or more in total consolidated assets, 
or $10 billion or more in total on-balance-sheet foreign exposures?
    Question 49: Should single-counterparty credit limits apply to a 
foreign banking organization's combined U.S. operations, or is 
application of single-counterparty credit limits to a foreign banking 
organization's combined U.S. operations unnecessary in light of the 
Basel Committee's adoption of a Large Exposures standard?
Gross Credit Exposure
    The proposed valuation rules for measuring gross credit exposure to 
a counterparty would be the same as those set forth in the proposed 
rule for domestic bank holding companies, other than the proposed 
valuation rules for derivatives exposures of U.S. branches and agencies 
that are subject to a qualifying master netting agreement. When 
calculating a U.S. branch or agency's gross credit exposure to a 
counterparty for a derivative contract that is subject to a qualifying 
master netting agreement, a foreign banking organization could choose 
either to use the exposure at default calculation set forth in the 
Board's advanced approaches capital rules (12 CFR 217.132(c)) provided 
that the collateral recognition rules of the proposed rule would apply, 
or use the gross valuation methodology for derivatives not subject to a 
qualified master netting agreements.\106\ Under this approach, a 
foreign banking organization would be able to rely on a qualified 
master netting agreement to which the U.S. branch or agency is subject 
that covers exposures of the foreign banking organization outside of 
the U.S. branch and agency network.
---------------------------------------------------------------------------

    \106\ See proposed rule Sec.  252.173(a)(11).
---------------------------------------------------------------------------

    Question 50: Is the proposed treatment of derivatives exposures of 
U.S. branches and agencies that are subject to a qualifying master 
netting agreement appropriate? What alternatives should the Board 
consider?
    Question 51: Should there be any other differences between the 
treatment of derivative exposures of a foreign banking organization's 
combined U.S. operations or U.S. intermediate holding company and the 
treatment derivative exposures of U.S. covered companies?
    Question 52: Should the rule provide a separate process that allows 
foreign banking organizations to receive Board approval to use internal 
models to value derivative transactions solely for the purpose of 
complying with this rule?
Net Credit Exposure
    The proposed rule describes how a covered entity would convert 
gross credit exposure amounts to net credit exposure amounts by taking 
into account eligible collateral, eligible guarantees, eligible credit 
and equity derivatives, other eligible hedges (that is, a short 
position in the counterparty's debt or equity securities), and for 
securities financing transactions, the effect also of bilateral netting 
agreements. The proposed treatment described below is generally 
consistent with the proposed treatment for domestic bank holding 
companies. However, the definition of ``eligible collateral'' for 
covered entities would exclude debt or equity securities (including 
convertible bonds) issued by an affiliate of the U.S. intermediate 
holding company or the combined U.S. operations of a foreign banking 
organization, and the definition of ``eligible protection provider'' 
would exclude the foreign banking organization or any affiliate 
thereof.\107\
---------------------------------------------------------------------------

    \107\ See proposed rule Sec.  252.171(k).
---------------------------------------------------------------------------

    Question 53: Does the proposed approach to the calculation of net 
credit exposure pose particular concerns for U.S. intermediate holding 
companies or foreign banking organizations, with respect to their U.S. 
operations?
Exposures to Funds and Securitizations
    The proposed rule's treatment for a covered entity's exposures to 
funds and securitizations would be the same as the proposed treatment 
for a domestic covered company's exposures to such entities.\108\
---------------------------------------------------------------------------

    \108\ See proposed rule Sec.  252.175.
---------------------------------------------------------------------------

    Question 54: Does the proposed treatment of exposures related to 
SPVs pose particular concerns for foreign banking organizations, with 
respect to its combined U.S. operations, or U.S. intermediate holding 
companies?
Exemptions
    As noted, section 165(e)(6) of the Dodd-Frank Act permits the Board 
to exempt transactions from the definition of the term ``credit 
exposure'' for purposes of this subsection, if the Board finds that the 
exemption is in the public interest and is consistent with the purposes 
of this subsection. The proposed rule would provide the same exemptions 
for the credit exposures of covered entities as the proposed rule 
provides for credit exposures of domestic covered companies.\109\ In 
addition, the proposed rule would include an additional exemption for a 
foreign banking organization's exposures to its home country sovereign, 
notwithstanding the risk weight assigned to that sovereign entity under 
the Board's Regulation Q (12 CFR part 217).\110\ This exemption would 
recognize that a foreign banking organization's U.S. operations may 
have exposures to its home country sovereign entity that are required 
by home country laws or are necessary to facilitate the normal course 
of business for the consolidated company. This proposed exemption would 
be in the public interest and consistent with the treatment of credit 
exposures of covered companies to the U.S. government.
---------------------------------------------------------------------------

    \109\ See proposed rule Sec.  252.177(a).
    \110\ See proposed rule Sec.  252.177(a)(4).
---------------------------------------------------------------------------

    Question 55: Would additional exemptions for foreign banking 
organizations or the U.S. intermediate holding companies of foreign 
banking organizations be appropriate? Why or why not?
Compliance
    Under the proposed rule, an U.S. intermediate holding company or 
the combined U.S. operations of a foreign banking organization with 
less than $250 billion in total consolidated assets, and less than $10 
billion in total on-balance-sheet foreign exposures, would be required 
to comply with the requirements of the proposed rule as of the end of 
each quarter.\111\ Other intermediate holding companies and foreign 
banking organizations would be required to comply with the proposed 
rule on a daily basis as of the end of each business day and submit a 
monthly compliance report demonstrating its daily compliance.\112\ A 
foreign banking organization would be required to ensure the compliance 
of its U.S. intermediate holding company and its combined U.S. 
operations. If either the U.S. intermediate holding company or the 
combined U.S. operations were not in compliance with respect to a 
counterparty, both of the U.S. intermediate holding company and the 
combined U.S. operations would be prohibited from engaging in any 
additional credit transactions with such

[[Page 14348]]

a counterparty, except in cases when the Board determines that such 
additional credit transactions are necessary or appropriate to preserve 
the safety and soundness of the foreign banking organization or 
financial stability.\113\ In considering special temporary exceptions, 
the Board could impose supervisory oversight and reporting measures 
that it determines are appropriate to monitor compliance with the 
foregoing standards.\114\
---------------------------------------------------------------------------

    \111\ See proposed rule Sec.  252.178(a).
    \112\ Id.
    \113\ See proposed rule Sec.  252.178(c).
    \114\ See proposed rule Sec.  252.178(d).
---------------------------------------------------------------------------

    Question 56: Should the rule provide a cure period for covered 
entities that are not compliant? Under what circumstances should such a 
cure period be provided, and how long should such a period be?
    Question 57: If a cure period is provided, would it be appropriate 
to generally prohibit additional credit transactions with the affected 
counterparty during the cure period? Are there additional situations in 
which additional credit transactions with the affected counterparty 
would be appropriate? What additional modifications or clarifications 
should the Board consider with respect to any cure period?
    Question 58: Should the Board consider any temporary exceptions 
particularly for foreign banking organizations or the U.S. intermediate 
holding companies of foreign banking organizations? In what situations 
would a temporary exception be appropriate?
Timing
    The proposed rule is designed to be less stringent for those 
foreign banking organizations and U.S. intermediate holding companies 
whose failure or distress would be less likely to pose a risk to U.S. 
financial stability. Foreign banking organizations and U.S. 
intermediate holding companies with less than $250 billion in total 
consolidated assets and less than $10 billion in total on-balance-sheet 
foreign assets would be required to comply initially with the proposed 
rule two years from the effective date of the proposed rule, unless 
that time is extended by the Board in writing.\115\ Foreign banking 
organizations and U.S. intermediate holding companies with $250 billion 
or more in total consolidated assets or $10 billion or more in total 
on-balance-sheet foreign assets would be required to comply initially 
with the proposed rule one year from the effective date of the rule, 
unless that time is extended by the Board in writing.\116\ Any company 
that becomes a covered company after the effective date of the rule 
would be required to comply with the requirements of the rule beginning 
on the first day of the fifth calendar quarter after it becomes a 
covered entity, unless that time is accelerated or extended by the 
Board in writing.\117\
---------------------------------------------------------------------------

    \115\ See proposed rule Sec. Sec.  252.170(c)(1)(i) and 
252.170(c)(2)(i).
    \116\ See proposed rule Sec. Sec.  252.170(c)(1)(ii) and 
252.170(c)(2)(ii).
    \117\ See proposed rule Sec.  252.170(d).
---------------------------------------------------------------------------

Regulatory Analysis

Paperwork Reduction Act

    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501 through 3521). The Board 
has reviewed the reporting requirements in sections 252.78(a) and 
252.178(a) of the proposed rules under the authority delegated to the 
Board by Office of Management and Budget (OMB). The Board will address 
these requirements in a separate notice, such as when the Board 
proposes reporting forms for companies subject to these rules to use to 
report credit exposures to their counterparties as those credit 
exposures would be measured under the proposed rules.

Solicitation of Comments on the Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rules in 
a simple and straightforward manner, and invites comment on the use of 
plain language. For example:
     Have the agencies organized the material to suit your 
needs? If not, how could they present the proposed rules more clearly?
     Are the requirements in the proposed rules clearly stated? 
If not, how could the proposed rules be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would achieve that?
     Is the section format adequate? If not, which of the 
sections should be changed and how?
     What other changes can the Board incorporate to make the 
regulation easier to understand?

Regulatory Flexibility Act Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
\118\ (RFA), the Board is publishing an initial regulatory flexibility 
analysis of the proposed rules. The RFA requires an agency either to 
provide an initial regulatory flexibility analysis with a proposed rule 
for which a general notice of proposed rulemaking is required or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. Based on its analysis 
and for the reasons stated below, the Board believes that these 
proposed rules will not have a significant economic impact on a 
substantial number of small entities. Nevertheless, the Board is 
publishing an initial regulatory flexibility analysis. A final 
regulatory flexibility analysis will be conducted after comments 
received during the public comment period have been considered.
---------------------------------------------------------------------------

    \118\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    In accordance with section 165 of the Dodd-Frank Act, the Board is 
proposing to amend Regulation YY to establish single-counterparty 
credit limits for bank holding companies, foreign banking 
organizations, and U.S. intermediate holding companies with total 
consolidated assets of $50 billion or more in order to limit the risks 
that the failure of any individual firm could pose to those 
organizations.\119\
---------------------------------------------------------------------------

    \119\ See 12 U.S.C. 5365(e).
---------------------------------------------------------------------------

    Under regulations issued by the Small Business Administration 
(SBA), a ``small entity'' includes a depository institution, bank 
holding company, or savings and loan holding company with assets of 
$550 million or less (small banking organizations).\120\ As discussed 
in the SUPPLEMENTARY INFORMATION, the proposed rules generally would 
apply to bank holding companies, foreign banking organizations, and 
U.S. intermediate holding companies with total consolidated assets of 
$50 billion or more. Companies that are subject to the proposed rule 
have consolidated assets that substantially exceed the $550 million 
asset threshold at which a banking entity is considered a ``small 
entity'' under SBA regulations. Because the proposed rules would not 
apply to any company with assets of $550 million or less, if adopted in 
final form, the proposed rules would not apply to any ``small entity'' 
for purposes of the RFA. The Board does not believe that the proposed 
rules duplicate, overlap, or

[[Page 14349]]

conflict with any other Federal rules. In light of the foregoing, the 
Board does not believe that the proposed rules, if adopted in final 
form, would have a significant economic impact on a substantial number 
of small entities supervised. Nonetheless, the Board seeks comment on 
whether the proposed rules would impose undue burdens on, or have 
unintended consequences for, small organizations, and whether there are 
ways such potential burdens or consequences could be minimized in a 
manner consistent with section 165(e) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \120\ See 13 CFR 121.201.
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 252

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

Authority and Issuance

    For the reasons stated in the preamble, the Board of Governors of 
the Federal Reserve System proposes to amend 12 CFR part 252 as 
follows:

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

0
1. The authority citation for part 252 continues to read as follows:

    Authority: 12 U.S.C. 321-338a, 1467a(g), 1818, 1831p-1, 1844(b), 
1844(c), 5361, 5365, 5366.


0
2. Add subpart H to read as follows:

Subpart H--Single-Counterparty Credit Limits

Sec.
252.70 Applicability.
252.71 Definitions.
252.72 Credit exposure limits.
252.73 Gross credit exposure.
252.74 Net credit exposure.
252.75 Investments in and exposures to securitization vehicles, 
investment funds, and other special purpose vehicles.
252.76 Aggregation of exposures to more than one counterparty due to 
economic interdependence or control relationships.
252.77 Exemptions.
252.78 Compliance.


Sec.  252.70  Applicability.

    (a) In general. A covered company is subject to the general credit 
exposure limit set forth in Sec.  252.72(a).
    (b) Covered companies with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures. A covered company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures is subject to the credit exposure limit set forth in 
Sec.  252.72(b).
    (c) Major covered companies. A major covered company is subject to 
the credit exposure limit set forth in Sec.  252.72(c).
    (d) Total consolidated assets. For purposes of this section, total 
consolidated assets are determined based on:
    (1) The average of the bank holding company's total consolidated 
assets in the four most recent consecutive quarters as reported 
quarterly on the FR Y-9C; or
    (2) If the bank holding company has not filed an FR Y-9C for each 
of the most recent four quarters, the average of the bank holding 
company's total consolidated assets in the most recent consecutive 
quarters as reported quarterly on the bank holding company's FR Y-9Cs.
    (e) Cessation of requirements. Once a covered company meets the 
requirements described in paragraphs (a) or (b) of this section, the 
company shall remain a covered company for purposes of this subpart 
unless and until the company has less than $50 billion in total 
consolidated assets as determined based on each of the bank holding 
company's four most recent FR Y-9Cs.
    (1) A bank holding company that has ceased to be a major covered 
company for purposes of paragraph (c) of this section shall no longer 
be subject to the requirements of Sec.  252.70(c) beginning on the 
first day of the calendar quarter following the reporting date on which 
it ceased to be a major covered company.
    (2) Nothing in paragraph (c) of this section shall preclude a 
company from becoming a covered company pursuant to paragraphs (a) or 
(b) of this section.
    (f) Measurement date. For purposes of this section, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (g) Initial applicability.
    (1) A covered company that is subject to this subpart under 
paragraph (a) of this section as of [INSERT EFFECTIVE DATE], must 
comply with the requirements of this subpart, including Sec.  
252.72(a), beginning on [INSERT DATE TWO YEARS FROM EFFECTIVE DATE], 
unless that time is extended by the Board in writing.
    (2) A covered company that is subject to this subpart under 
paragraph (b) of this section as of [INSERT EFFECTIVE DATE], must 
comply with the requirements of this subpart, including Sec. Sec.  
252.72(b)-(c), as applicable, beginning on [INSERT DATE ONE YEAR FROM 
EFFECTIVE DATE], unless that time is extended by the Board in writing.
    (3) A company that becomes a covered company subject to this 
subpart under paragraphs (a), (b), or (c) of this section after the 
effective date of this part will be subject to the requirements of this 
subpart in accordance with paragraph (h) of this section.
    (h) Ongoing applicability. Except as provided in paragraph (g)(1) 
or (g)(2) of this section, a covered company that is subject to this 
subpart under paragraphs (a), (b), or (c) of this section must comply 
with the requirements of Sec. Sec.  252.72(a)-(c), as applicable, 
beginning on the first day of the fifth calendar quarter after it 
becomes a covered company, unless that time is accelerated or extended 
by the Board in writing.


Sec.  252.71  Definitions.

    For purposes of this subpart:
    (a) Adjusted market value means:
    (1) With respect to the value of securities transferred by the 
covered company to a counterparty, the sum of:
    (i) The market value of the securities; and
    (ii) The product of the market value of the securities multiplied 
by the applicable collateral haircut in Table 1 to Sec.  217.132 of the 
Board's Regulation Q (12 CFR 217.132); and
    (2) With respect to eligible collateral received by the covered 
company from a counterparty:
    (i) The market value of the securities; minus
    (ii) The market value of the securities multiplied by the 
applicable collateral haircut in Table 1 to Sec.  217.132 of the 
Board's Regulation Q (12 CFR 217.132).
    (3) Prior to calculating the adjusted market value pursuant to 
paragraphs (1) and (2) of this section, with regard to a transaction 
that meets the definition of ``repo-style transaction'' in Sec.  217.2 
the Board's Regulation Q (12 CFR 217.2), the covered company would 
first multiply the applicable collateral haircuts in Table 1 to Sec.  
217.132 of the Board's Regulation Q (12 CFR 217.132) by the square root 
of \1/2\.
    (b) Aggregate net credit exposure means the sum of all net credit 
exposures of a covered company to a single counterparty.
    (c) Bank-eligible investments means investment securities that a 
national bank is permitted to purchase, sell, deal in, underwrite, and 
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
    (d) Capital stock and surplus means, with respect to a bank holding 
company, the sum of the following amounts in each case as reported by 
the bank holding company on the most recent FR Y-9C report:
    (1) The company's tier 1 and tier 2 capital, as calculated under 
the capital

[[Page 14350]]

adequacy guidelines applicable to that bank holding company under the 
Board's Regulation Q (12 CFR part 217); and
    (2) The balance of the allowance for loan and lease losses of the 
bank holding company not included in its tier 2 capital under the 
capital adequacy guidelines applicable to that bank holding company 
under the Board's Regulation Q (12 CFR part 217).
    (e) Counterparty means:
    (1) With respect to a natural person, the person, and members of 
the person's immediate family;
    (2) With respect to a company, the company and all persons that 
that counterparty
    (i) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the person;
    (ii) Owns or controls 25 percent or more of the total equity of the 
person; or
    (iii) Consolidates for financial reporting purposes, as described 
in Sec.  252.72(d), collectively;
    (3) With respect to a State, the State and all of its agencies, 
instrumentalities, and political subdivisions (including any 
municipalities) collectively;
    (4) With respect to a foreign sovereign entity that is not assigned 
a zero percent risk weight under the standardized approach in the 
Board's Regulation Q (12 CFR part 217, subpart D), the foreign 
sovereign entity and all of its agencies and instrumentalities (but not 
including any political subdivision), collectively; and
    (5) With respect to a political subdivision of a foreign sovereign 
entity such as states, provinces, and municipalities, any political 
subdivision of a foreign sovereign entity and all of such political 
subdivision's agencies and instrumentalities, collectively.
    (f) Covered company means any bank holding company (other than a 
foreign banking organization that is subject to subpart Q of the 
Board's Regulation YY), that has $50 billion or more in total 
consolidated assets, calculated pursuant to Sec.  252.70(d), and all of 
its subsidiaries.
    (g) Credit derivative has the same meaning as in Sec.  217.2 of the 
Board's Regulation Q (12 CFR 217.2).
    (h) Credit transaction means, with respect to a counterparty:
    (1) Any extension of credit to the counterparty, including loans, 
deposits, and lines of credit, but excluding uncommitted lines of 
credit;
    (2) Any repurchase transaction or reverse repurchase transaction 
with the counterparty;
    (3) Any securities lending or securities borrowing transaction with 
the counterparty;
    (4) Any guarantee, acceptance, or letter of credit (including any 
endorsement, confirmed letter of credit, or standby letter of credit) 
issued on behalf of the counterparty;
    (5) Any purchase of, or investment in, securities issued by the 
counterparty;
    (6) Any credit exposure to the counterparty in connection with a 
derivative transaction between the covered company and the 
counterparty;
    (7) Any credit exposure to the counterparty in connection with a 
credit derivative or equity derivative transaction between the covered 
company and a third party, the reference asset of which is an 
obligation or equity security of the counterparty; and
    (8) Any transaction that is the functional equivalent of the above, 
and any other similar transaction that the Board, by regulation, 
determines to be a credit transaction for purposes of this subpart.
    (i) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (j) Derivative transaction means any transaction that is a 
contract, agreement, swap, warrant, note, or option that is based, in 
whole or in part, on the value of, any interest in, or any quantitative 
measure or the occurrence of any event relating to, one or more 
commodities, securities, currencies, interest or other rates, indices, 
or other assets.
    (k) Eligible collateral means collateral in which the covered 
company has a perfected, first priority security interest or the legal 
equivalent thereof, if outside of the United States (with the exception 
of cash on deposit and notwithstanding the prior security interest of 
any custodial agent) and is in the form of:
    (1) Cash on deposit with the covered company (including cash held 
for the covered company by a third-party custodian or trustee);
    (2) Debt securities (other than mortgage- or asset-backed 
securities and resecuritization securities, unless those securities are 
issued by a U.S. government-sponsored enterprise) that are bank-
eligible investments and that are investment grade;
    (3) Equity securities that are publicly traded; or
    (4) Convertible bonds that are publicly traded.
    (l) Eligible credit derivative means a single-name credit 
derivative or a standard, non-tranched index credit derivative, 
provided that:
    (1) The derivative contract is subject to an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties;
    (3) If the credit derivative is a credit default swap, the 
derivative contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period, if 
any, that is in line with the grace period of the reference exposure; 
and
    (ii) Receivership, insolvency, liquidation, conservatorship, or 
inability of the reference exposure issuer to pay its debts, or its 
failure or admission in writing of its inability generally to pay its 
debts as they become due and similar events;
    (4) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event 
valuations of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer 
an exposure to the protection provider at settlement, the terms of at 
least one of the exposures that is permitted to be transferred under 
the contract provides that any required consent to transfer may not be 
unreasonably withheld; and
    (7) If the credit derivative is a credit default swap, the contract 
clearly identifies the parties responsible for determining whether a 
credit event has occurred, specifies that this determination is not the 
sole responsibility of the protection provider, and gives the 
protection purchaser the right to notify the protection provider of the 
occurrence of a credit event.
    (m) Eligible equity derivative means an equity derivative, provided 
that:
    (1) The derivative contract has been confirmed by the 
counterparties;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties; and
    (3) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract.
    (n) Eligible guarantee has the same meaning as in Sec.  217.2 of 
the Board's Regulation Q (12 CFR 217.2) that is provided by an eligible 
protection provider.
    (o) Eligible protection provider has the same meaning as ``eligible 
guarantor'' in

[[Page 14351]]

Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (p) Equity derivative has the same meaning as ``equity derivative 
contract'' in Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (q) Financial entity means:
    (1) A depository institution;
    (2) A bank holding company;
    (3) A savings and loan holding company (as defined in 12 U.S.C. 
1467a);
    (4) A securities broker or dealer registered with the U.S. 
Securities and Exchange Commission under the Securities Exchange Act of 
1934 (15 U.S.C. 78o et seq.);
    (5) An insurance company that is subject to the supervision by a 
State insurance regulator;
    (6) A foreign banking organization;
    (7) A non-U.S.-based securities firm or a non-U.S.-based insurance 
company that is subject to consolidated supervision and regulation 
comparable to that applicable to U.S. depository institutions, 
securities broker-dealers, or insurance companies;
    (8) A central counterparty; and
    (9) A legal entity whose main business includes the management of 
financial assets, lending, factoring, leasing, provision of credit 
enhancements, securitization, investments, financial custody, 
proprietary trading, and other financial services.
    (r) Gross credit exposure means, with respect to any credit 
transaction, the credit exposure of the covered company before 
adjusting, pursuant to section 252.74, for the effect of any qualifying 
master netting agreement, eligible collateral, eligible guarantee, 
eligible credit derivative, eligible equity derivative, other eligible 
hedge, and any unused portion of certain extensions of credit.
    (s) Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    (t) Intraday credit exposure means credit exposure of a covered 
company to a counterparty that by its terms is to be repaid, sold, or 
terminated by the end of its business day in the United States.
    (u) Investment grade has the same meaning as in Sec.  217.2 of the 
Board's Regulation Q (12 CFR 217.2).
    (v) Major counterparty means any:
    (1) Major covered company and all of its subsidiaries, 
collectively;
    (2) Any foreign banking organization (and all of its subsidiaries, 
collectively) that meets one of the following conditions:
    (i) The foreign banking organization has the characteristics of a 
global systemically important banking organization under the assessment 
methodology and the higher loss absorbency requirement for global 
systemically important banks issued by the Basel Committee on Banking 
Supervision, as updated from time to time; or
    (ii) The Board, using information reported by the foreign banking 
organization or its U.S. subsidiaries, information that is publicly 
available, and confidential supervisory information, determines:
    (A) That the foreign banking organization would be a global 
systemically important banking organization under the global 
methodology;
    (B) That the foreign banking organization, if it were subject to 
the Board's Regulation Q, would be identified as a global systemically 
important bank holding company under Sec.  217.402 of the Board's 
Regulation Q; or
    (C) That the U.S. intermediate holding company, if it were subject 
to the Board's Regulation Q, would be identified as a global 
systemically important bank holding company.
    (iii) A foreign banking organization that prepares or reports for 
any purpose the indicator amounts necessary to determine whether the 
foreign banking organization is a global systemically important banking 
organization under the assessment methodology and the higher loss 
absorbency requirement for global systemically important banks issued 
by the Basel Committee on Banking Supervision, as updated from time to 
time, must use the data to determine whether the foreign banking 
organization has the characteristics of a global systemically important 
banking organization under the global methodology; and
    (3) Any nonbank financial company supervised by the Board.
    (w) Major covered company means any U.S. bank holding company 
identified as a global systemically important bank holding company 
pursuant to 12 CFR 217.402, and all of its subsidiaries.
    (x) Net credit exposure means, with respect to any credit 
transaction, the gross credit exposure of a covered company calculated 
under Sec.  252.73, as adjusted in accordance with Sec.  252.74.
    (y) Qualifying central counterparty has the same meaning as in 
Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (z) Qualifying master netting agreement has the same meaning as in 
Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (aa) Short sale means any sale of a security which the seller does 
not own or any sale which is consummated by the delivery of a security 
borrowed by, or for the account of, the seller.
    (bb) Sovereign entity means a central national government 
(including the U.S. government) or an agency, department, ministry, or 
central bank, but not including any political governmental subdivision 
such as a state, province, or municipality.
    (cc) Subsidiary of a specified company means a company that is 
directly or indirectly controlled by the specified company.
    (dd) Tier 1 capital means common equity tier 1 capital and 
additional tier 1 capital, as defined in the Board's Regulation Q (12 
CFR part 217).


Sec.  252.72  Credit exposure limits.

    (a) General limit on aggregate net credit exposure. No covered 
company shall have an aggregate net credit exposure to any unaffiliated 
counterparty that exceeds 25 percent of the consolidated capital stock 
and surplus of the covered company.
    (b) Limit on aggregate net credit exposure for covered companies 
with $250 billion or more in total consolidated assets or $10 billion 
or more in total on-balance-sheet foreign exposures. No covered company 
that has $250 billion or more in total consolidated assets or $10 
billion or more in total on-balance-sheet foreign exposures shall have 
an aggregate net credit exposure to any unaffiliated counterparty that 
exceeds 25 percent of the covered company's tier 1 capital.
    (c) Limit on aggregate net credit exposure of major covered 
companies to major counterparties. No major covered company shall have 
aggregate net credit exposure to any unaffiliated major counterparty 
that exceeds 15 percent of the tier 1 capital of the major covered 
company.
    (d) For purposes of this subpart, a counterparty and major 
counterparty shall include any person that the counterparty or major 
counterparty
    (1) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the person;
    (2) Owns or controls 25 percent or more of the total equity of the 
person; or
    (3) Consolidates for financial reporting purposes.


Sec.  252.73  Gross credit exposure.

    (a) Calculation of gross credit exposure. Except as provided in 
paragraph (b), the amount of gross credit exposure of a covered company 
to a counterparty with respect to a credit transactions is, in the case 
of:

[[Page 14352]]

    (1) Loans by a covered company to the counterparty and leases in 
which the covered company is the lessor and the counterparty is the 
lessee, equal to the amount owed by the counterparty to the covered 
company under the transaction.
    (2) Debt securities held by the covered company that are issued by 
the counterparty, equal to:
    (i) The market value of the securities, for trading and available-
for-sale securities; and
    (ii) The amortized purchase price of the securities, for securities 
held to maturity.
    (3) Equity securities held by the covered company that are issued 
by the counterparty, equal to the market value.
    (4) Repurchase transactions, equal to the adjusted market value of 
securities transferred by the covered company to the counterparty.
    (5) Reverse repurchase transactions, equal to the amount of cash 
transferred by the covered company to the counterparty.
    (6) Securities borrowing transactions, equal to:
    (i) The amount of cash collateral transferred by the covered 
company to the counterparty; plus
    (ii) The adjusted market value of securities collateral transferred 
by the covered company to the counterparty.
    (7) Securities lending transactions, equal to the adjusted market 
value of securities lent by the covered company to the counterparty.
    (8) Committed credit lines extended by a covered company to a 
counterparty, equal to the face amount of the credit line.
    (9) Guarantees and letters of credit issued by a covered company on 
behalf of a counterparty, equal to the maximum potential loss to the 
covered company on the transaction.
    (10) Derivative transactions between the covered company and the 
counterparty not subject to a qualifying master netting agreement:
    (i) Valued at an amount equal to the sum of
    (A) The current exposure of the derivatives contract equal to the 
greater of the mark-to-market value of the derivative contract or zero; 
and
    (B) The potential future exposure of the derivatives contract, 
calculated by multiplying the notional principal amount of the 
derivative contract by the applicable conversion factor in Table 2 to 
Sec.  217.132 of the Board's Regulation Q (12 CFR 217.132); and
    (ii) In cases where a covered company is required to recognize an 
exposure to an eligible protection provider pursuant to Sec.  
252.74(e), the covered company must exclude the relevant derivative 
transaction when calculating its gross exposure to the original 
counterparty under this section.
    (11) Derivative transactions between the covered company and the 
counterparty subject to a qualifying master netting agreement:
    (i) The derivative transaction shall be valued using any of the 
methods that the covered company is authorized to use under the Board's 
Regulation Q (12 CFR part 217, subparts D and E) to value such 
transactions; and
    (ii) In cases where a covered company is required to recognize an 
exposure to an eligible protection provider pursuant to Sec.  
252.74(e), the covered company must exclude the relevant derivative 
transaction when calculating its gross exposure to the original 
counterparty under this section.
    (12) Credit or equity derivative transactions between the covered 
company and a third party where the covered company is the protection 
provider and the reference asset is an obligation or equity security of 
the counterparty, equal to the maximum potential loss to the covered 
company on the transaction.
    (b) Investments in and Exposures to Securitization Vehicles, 
Investment Funds, and Other Special Purpose Vehicles. A covered company 
that has $250 billion or more in total consolidated assets or $10 
billion or more in total on-balance-sheet foreign exposures shall 
calculate its gross credit exposure for investments in and exposures to 
a securitization vehicle, investment fund, and other special purpose 
vehicle pursuant to Sec.  252.75.
    (c) Attribution rule. A covered company must treat any credit 
transaction with any person as a credit transaction with a 
counterparty, to the extent that the proceeds of the transaction are 
used for the benefit of, or transferred to, that counterparty.


Sec.  252.74  Net Credit Exposure.

    (a) In general. For purposes of this subpart, a covered company 
shall calculate its net credit exposure to a counterparty by adjusting 
its gross credit exposure to that counterparty in accordance with the 
rules set forth in this section.
    (b) Calculation of net credit exposure for repurchase transactions, 
reverse repurchase transactions, securities lending transactions, and 
securities borrowing transactions. With respect to any repurchase 
transaction, reverse repurchase transaction, securities lending 
transaction, and securities borrowing transaction with a counterparty 
that is subject to a bilateral netting agreement with that counterparty 
and that meets the definition of ``repo-style transaction'' in Sec.  
217.2 of the Board's Regulation Q (12 CFR 217.2), a covered company's 
net credit exposure to a counterparty shall be equal to the exposure at 
default amount calculated under Sec.  217.37(c)(2) of the Board's 
Regulation Q (12 CFR 217.37(c)(2)); provided that:
    (1) The covered company shall apply the standardized supervisory 
haircuts as provided in 12 CFR 217.37(c)(3)(iii) of the Board's 
Regulation (12 CFR 217.37(c)(3)(iii), and is not permitted to use its 
own internal estimates for haircuts;
    (2) The covered company shall, in calculating its net credit 
exposure to a counterparty as a result of the transactions described in 
paragraph (b) of this section, disregard any collateral received from 
that counterparty that does not meet the definition of ``eligible 
collateral'' in Sec.  252.71(k); and
    (3) The covered company shall include the adjusted market value of 
any eligible collateral, as further adjusted by the application of the 
maturity mismatch adjustment approach of Sec.  217.36(d) of the Board's 
Regulation Q (12 CFR 217.36(d)), if applicable, when calculating its 
gross credit exposure to the collateral issuer, including in instances 
where the underlying repurchase transaction, reverse repurchase 
transaction, securities lending transaction, or securities borrowing 
transaction would not be subject to the credit limits of Sec.  272.72.
    (c) Eligible collateral.
    (1) In computing its net credit exposure to a counterparty for any 
credit transaction other than transactions described in paragraph (b) 
of this section, a covered company must reduce its gross credit 
exposure on the transaction by:
    (i) The adjusted market value of any eligible collateral, in cases 
where the eligible collateral has the same or greater maturity as the 
credit transactions; or
    (ii) The adjusted market value of any eligible collateral, as 
further adjusted by application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q (12 CFR 
217.36(d)), if the eligible collateral has an original maturity equal 
to or greater than one year and a residual maturity of not less than 
three months, in cases where the eligible collateral has a shorter 
maturity than the credit transaction.
    (2) A covered company that reduces its gross credit exposure to a 
counterparty as required under paragraph (c)(1) of this section must

[[Page 14353]]

include the adjusted market value of the eligible collateral, as 
further adjusted by the application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q (12 CFR 
217.36(d)), if applicable, when calculating its gross credit exposure 
to the collateral issuer, including in instances where the underlying 
credit transaction would not be subject to the credit limits of Sec.  
272.72. Notwithstanding the foregoing, in no event will the covered 
company's gross credit exposure to the issuer of collateral be in 
excess of its gross credit exposure to the counterparty on the credit 
transaction.
    (d) Eligible guarantees.
    (1) In calculating net credit exposure to a counterparty for any 
credit transaction, a covered company must reduce its gross credit 
exposure to the counterparty by any eligible guarantees from an 
eligible protection provider that covers the transaction by:
    (i) The amount of any eligible guarantees from an eligible 
protection provider that covers the transaction, in cases where the 
eligible guarantee has the same or greater maturity as the credit 
transaction; or
    (ii) The amount of any eligible guarantees from an eligible 
protection provider that covers the transaction as further adjusted by 
application of the maturity mismatch adjustment approach of Sec.  
217.36(d) of the Board's Regulation Q (12 CFR 217.36(d)), if the 
eligible guarantees have an original maturity equal to or greater than 
one year and a residual maturity of not less than three months, in 
cases where the eligible guarantee has a shorter maturity than the 
credit transaction.
    (2) A covered company that reduces its gross credit exposure to a 
counterparty as required under paragraph (d)(1) must include the amount 
of eligible guarantees when calculating its gross credit exposure to 
the eligible protection provider, including in instances where the 
underlying credit transaction would not be subject to the credit limits 
of Sec.  272.72. Notwithstanding the foregoing, in no event will the 
covered company's gross credit exposure to an eligible protection 
provider with respect to an eligible guarantee be in excess of its 
gross credit exposure to the counterparty on the credit transaction 
prior to recognition of the eligible guarantee.
    (e) Eligible credit and equity derivatives. (1) In calculating net 
credit exposure to a counterparty for a credit transaction, a covered 
company must reduce its gross credit exposure to the counterparty by:
    (i) The notional amount of any eligible credit or equity derivative 
from an eligible protection provider, in cases where the eligible 
credit or equity derivative has a maturity that is the same or greater 
than the maturity of the credit transaction; or
    (ii) The notional amount of any eligible credit or equity 
derivative from an eligible protection provider, as further adjusted by 
application of the maturity mismatch adjustment approach of Sec.  
217.36(d) of the Board's Regulation Q (12 CFR 217.36(d)), if the 
eligible credit or equity derivative has an original maturity equal to 
or greater than one year and a residual maturity of not less than three 
months, in cases where the eligible credit or equity derivative has a 
shorter maturity than the credit transaction.
    (2)(i) In general, a covered company that reduces its gross credit 
exposure to a counterparty as provided under paragraph (e)(1) must 
include the notional amount of the eligible credit or equity derivative 
from an eligible protection provider, as further adjusted by the 
application of the maturity mismatch adjustment approach of Sec.  
217.36(d) of the Board's Regulation Q (12 CFR 217.36(d)), as 
applicable, when calculating its gross credit exposure to the eligible 
protection provider, including in instances where the underlying credit 
transaction would not be subject to the credit limits of Sec.  272.72. 
Notwithstanding the foregoing, in no event will the covered company's 
gross credit exposure to an eligible protection provider with respect 
to an eligible credit or equity derivative be in excess of its gross 
credit exposure to that counterparty on the credit transaction prior to 
recognition of the eligible credit or equity derivative; and
    (ii) In cases where the eligible credit or equity derivative is 
used to hedge covered positions and available-for-sale exposures that 
are subject to the Board's market risk rule (12 CFR part 217, subpart 
F) and the counterparty on the hedged transaction is not a financial 
entity, the amount of credit exposure that a company must recognize to 
the eligible protection provider is the amount that would be calculated 
pursuant to Sec.  252.73(a), including in instances where the 
underlying credit transaction would not be subject to the credit limits 
of Sec.  272.72.
    (f) Other eligible hedges. In calculating net credit exposure to a 
counterparty for a credit transaction, a covered company may reduce its 
gross credit exposure to the counterparty by the face amount of a short 
sale of the counterparty's debt or equity security, provided that:
    (1) The instrument in which the covered company has a short 
position is junior to, or pari passu with, the instrument in which the 
covered company has the long position; and
    (2) The instrument in which the covered company has a short 
position and the instrument in which the covered company has the long 
position are either both treated as trading or available-for-sale 
exposures or both treated as held-to-maturity exposures.
    (g) Unused portion of certain extensions of credit. (1) In 
computing its net credit exposure to a counterparty for a credit line 
or revolving credit facility, a covered company may reduce its gross 
credit exposure by the amount of the unused portion of the credit 
extension to the extent that the covered company does not have any 
legal obligation to advance additional funds under the extension of 
credit, until the counterparty provides the amount of adjusted market 
value of collateral required with respect to the entire used portion of 
the extension of credit.
    (2) To qualify for this reduction, the credit contract must specify 
that any used portion of the credit extension must be fully secured by 
collateral that is:
    (i) Cash;
    (ii) Obligations of the United States or its agencies; or
    (iii) Obligations directly and fully guaranteed as to principal and 
interest by, the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency, 
and any additional obligations issued by a U.S. government-sponsored 
enterprise as determined by the Board.
    (h) Credit transactions involving exempt and excluded persons. If a 
covered company has a credit transaction with any person that is exempt 
from this subpart under Sec.  252.75, or is otherwise excluded from 
this subpart, and the covered company has reduced its credit exposure 
on the credit transaction with that person by obtaining collateral from 
that person or a guarantee or credit or equity derivative from an 
eligible protection provider, the covered company shall calculate its 
credit exposure to the issuer of the collateral or protection provider, 
as applicable, in accordance with the rules set forth in this section 
to the same extent as if the credit transaction with the person were 
subject to the requirements in this subpart, including Sec.  252.72.

[[Page 14354]]

Sec.  252.75  Investments in and exposures to securitization vehicles, 
investment funds, and other special purpose vehicles.

    (a) In general. (1) This section applies only to covered companies 
with $250 billion or more in total consolidated assets or $10 billion 
or more in on-balance-sheet foreign exposures, subject to paragraph (d) 
of this section.
    (2)(i) If a covered company can satisfy the requirements of 
paragraph (a)(3) of this section, a covered company must calculate its 
gross credit exposure to each securitization vehicle, investment fund, 
and other special purpose vehicle in which it invests pursuant to Sec.  
252.73(a), and the covered company is not required to calculate its 
gross credit exposure to each issuer of assets held by a securitization 
vehicle, investment fund, or other special purpose vehicle.
    (ii) If a covered company cannot satisfy the requirements of 
paragraph (a)(3), the covered company must calculate its gross credit 
exposure to each issuer of assets held by a securitization vehicle, 
investment fund, or other special purpose vehicle using the look-
through approach in paragraph (b) of this section.
    (3) A covered company is not required to calculate its gross credit 
exposure to each issuer of assets held by a securitization vehicle, 
investment fund, or other special purpose vehicle, as applicable, if 
the covered company can demonstrate that its gross credit exposure to 
each issuer, considering only the credit exposures to that issuer 
arising from the covered company's investment in a particular 
securitization vehicle, investment fund, or other special purpose 
vehicle, is less than 0.25 percent of the covered company's:
    (i) Capital stock and surplus in the case of a covered company 
subject to the credit exposure limit of Sec.  252.72(a); or
    (ii) Tier 1 capital in the case of a covered company subject to the 
credit exposure limit of Sec.  252.72(b).
    (b) Look-through Approach. (1) A covered company that cannot 
satisfy the requirements of paragraph (a)(3) must calculate its gross 
credit exposure, for purposes of Sec.  252.73(a), to each issuer of 
assets held by a securitization vehicle, investment fund, or other 
special purpose vehicle pursuant to paragraph (b)(3).
    (2) If a covered company that cannot satisfy the requirements of 
paragraph (a)(3) of this section is unable to identify each issuer of 
assets held by a securitization vehicle, investment fund, or other 
special purpose vehicle, the covered company, for purposes of paragraph 
(b)(3) of this section, must attribute the gross credit exposure to a 
single unknown counterparty, and the limits of Sec.  252.72 shall apply 
to that counterparty as a single counterparty.
    (3) A covered company that is required to calculate its gross 
credit exposure to an issuer of assets held by a securitization 
vehicle, investment fund, or other special purpose vehicle pursuant to 
paragraph (b)(1) of this section, or to an unknown counterparty 
pursuant to paragraph (b)(2) of this section, must calculate the gross 
credit exposure as follows:
    (i) Where all investors in the securitization vehicle, investment 
fund, or other special purpose vehicle rank pari passu, the gross 
credit exposure is equal to the covered company's pro rata share 
multiplied by the value of the assets attributed to the issuer or the 
unknown counterparty, as applicable, that are held within the 
structure; and
    (ii) Where all investors in the securitization vehicle, investment 
fund, or other special purpose vehicle do not rank pari passu, the 
gross credit exposure is equal to:
    (A) The lower of the value of the tranche in which the covered 
company has invested, calculated pursuant to Sec.  252.73(a), and the 
value of each asset attributed to the issuer or the unknown 
counterparty, as applicable, that are held by the securitization 
vehicle, investment fund, or other special purpose vehicle; multiplied 
by
    (B) The pro rata share of the covered company's investment in the 
tranche.
    (c) Exposures to Third Parties. (1) Notwithstanding any other 
requirement in this section, a covered company must recognize, for 
purposes of this subpart, a gross credit exposure to each third party 
that has a contractual or other business relationship with a 
securitization vehicle, investment fund, or other special purpose 
vehicle, such as a fund manager or protection provider to such 
securitization vehicle, investment fund, or other special purpose 
vehicle, whose failure or material financial distress would cause a 
loss in the value of the covered company's investment in or exposure to 
the securitization vehicle, investment fund, or other special purpose 
vehicle.
    (2) For purposes of Sec.  252.72, with respect to a covered 
company's gross credit exposure to a third party that a covered company 
must recognize pursuant to paragraph (c)(1) of this section, the 
covered company shall recognize an exposure to the third party in an 
amount equal to the covered company's gross credit exposure to the 
associated securitization vehicle, investment fund, or other special 
purpose vehicle, in addition to the covered company's gross credit 
exposure to the associated securitization vehicle, investment fund, or 
other special purpose vehicle.
    (d) Notwithstanding paragraph (a)(1) of this section, in order to 
avoid evasion of this subpart, the Board may determine, after notice to 
the covered company and opportunity for hearing, that a covered company 
with less than $250 billion in total consolidated assets and less than 
$10 billion in total on-balance-sheet foreign exposures must apply the 
look-through approach or recognize exposures to third parties that have 
a contractual or other business relationship for purposes of this 
subpart.


Sec.  252.76  Aggregation of exposures to more than one counterparty 
due to economic interdependence or control relationships.

    (a) Aggregation of Exposures to More than One Counterparty due to 
Economic Interdependence. (1)(i) If a covered company has an aggregate 
net credit exposure to any unaffiliated counterparty that exceeds 5 
percent of the consolidated capital stock and surplus of the covered 
company, or 5 percent of its tier 1 capital in the case of a covered 
company with $250 billion or more in total consolidated assets or $10 
billion or more in total foreign exposures, the covered company shall 
analyze its relationship with the unaffiliated counterparty under 
paragraph (a)(2) of this section to determine whether the unaffiliated 
counterparty is economically interdependent with one or more other 
unaffiliated counterparties of the covered company.
    (ii) For purposes of this paragraph, two counterparties are 
economically interdependent if the failure, default, insolvency, or 
material financial distress of one counterparty would cause the 
failure, default, insolvency, or material financial distress of the 
other counterparty, taking into account the factors in paragraph (a)(2) 
of this section.
    (iii) If a covered company or the Board determines pursuant to 
paragraph (a)(2) or (a)(3) of this section, as applicable, that one or 
more other unaffiliated counterparties of a covered company are 
economically dependent, the covered company shall aggregate its net 
credit exposure to the unaffiliated counterparties for all purposes 
under this subpart, including but not limited to, Sec.  252.72.
    (2) In making a determination as to whether any two counterparties 
are economically interdependent, a covered company shall consider the 
following factors:

[[Page 14355]]

    (i) Whether 50 percent or more of one counterparty's gross revenue 
or gross expenditures are derived from transactions with the other 
counterparty;
    (ii) Whether one counterparty (counterparty A) has fully or partly 
guaranteed the credit exposure of the other counterparty (counterparty 
B), or is liable by other means, and the credit exposure is significant 
enough that counterparty B is likely to default if presented with a 
claim relating to the guarantee or liability;
    (iii) Whether 25 percent or more of one counterparty's production 
or output is sold to the other counterparty, which cannot easily be 
replaced by other customers;
    (iv) Whether the expected source of funds to repay any credit 
exposure between the counterparties is the same and at least one of the 
counterparties does not have another source of income from which the 
extension of credit may be fully repaid;
    (v) Whether the financial distress of one counterparty 
(counterparty A) is likely to impair the ability of the other 
counterparty (counterparty B) to fully and timely repay counterparty 
B's liabilities;
    (vi) Whether one counterparty (counterparty A) has made a loan to 
the other counterparty (counterparty B) and is relying on repayment of 
that loan in order to satisfy its obligations to the covered company, 
and counterparty A does not have another source of income that it can 
use to satisfy its obligations to the covered company; and
    (vii) Any other indicia of interdependence that the covered company 
determines to be relevant to this analysis.
    (3) In order to avoid evasion of this subpart, the Board may 
determine, after notice to the covered company and opportunity for 
hearing, that one or more unaffiliated counterparties of a covered 
company are economically dependent for purposes of this subpart. In 
making any such determination, the Board shall consider the factors in 
paragraph (a)(2) of this section as well as any other indicia of 
economic interdependence that the Board determines to be relevant.
    (b) Aggregation of exposures to more than one counterparty due to 
certain control relationships. (1) A covered company shall assess 
whether counterparties are connected by control relationships due to 
the following factors:
    (i) The presence of voting agreements;
    (ii) Ability of one counterparty to significantly influence the 
appointment or dismissal of another counterparty's administrative, 
management or governing body, or the fact that a majority of members of 
such body have been appointed solely as a result of the exercise of the 
first counterparty's voting rights; and
    (iii) Ability of one counterparty to exercise a controlling 
influence over the management or policies of another counterparty.
    (2) If a covered company or the Board determines pursuant to 
paragraph (b)(1) or (b)(3) of this section that one or more other 
unaffiliated counterparties of a covered company are connected by 
control relationships, the covered company shall aggregate its net 
credit exposure to the unaffiliated counterparties for all purposes 
under this subpart, including but not limited to, Sec.  252.72.
    (3) In order to avoid evasion of this subpart, the Board may 
determine, after notice to the covered company and opportunity for 
hearing, that one or more unaffiliated counterparties of a covered 
company are connected by control relationships for purposes of this 
subpart. In making any such determination, the Board shall consider the 
factors in paragraph (b)(1) of this section as well as any other 
control relationships that the Board determines to be relevant.


Sec.  252.77  Exemptions.

    (a) Exempted exposure categories. The following categories of 
credit transactions are exempt from the limits on credit exposure under 
this subpart:
    (1) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation, only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency, and any additional 
obligations issued by a U.S. government-sponsored entity as determined 
by the Board.
    (2) Intraday credit exposure to a counterparty.
    (3) Trade exposures to a qualifying central counterparty related to 
the covered company's clearing activity, including potential future 
exposure arising from transactions cleared by the qualifying central 
counterparty and pre-funded default fund contributions.
    (4) Any transaction that the Board exempts if the Board finds that 
such exemption is in the public interest and is consistent with the 
purpose of this section.
    (b) Exemption for Federal Home Loan Banks. For purposes of this 
subpart, a covered company does not include any Federal Home Loan Bank.
    (c) Additional Exemptions by the Board. The Board may, by 
regulation or order, exempt transactions, in whole or in part, from the 
definition of the term ``credit exposure,'' if the Board finds that the 
exemption is in the public interest and is consistent with the purpose 
of Sec.  165(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5365(e)).


Sec.  252.78  Compliance.

    (a) Scope of compliance. A covered company with $250 billion or 
more in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures must comply with the requirements of 
this section on a daily basis at the end of each business day and 
submit on a monthly basis a report demonstrating its daily compliance. 
A covered company with less than $250 billion in total consolidated 
assets and less than $10 billion in total on-balance-sheet foreign 
exposures must comply with the requirements of this section on a 
quarterly basis and submit on a quarterly basis a report demonstrating 
its quarterly compliance, unless the Board determines and notifies that 
company that more frequent compliance and reporting is required.
    (b) Qualifying Master Netting Agreement. A covered company must 
establish and maintain procedures that meet or exceed the requirements 
of Sec.  217.3(d) of the Board's Regulation Q (12 CFR 217.3(d)) to 
monitor possible changes in relevant law and to ensure that the 
agreement continues to satisfy the requirements of a qualifying master 
netting agreement.
    (c) Noncompliance. Except as otherwise provided in this section, if 
a covered company is not in compliance with this subpart with respect 
to a counterparty solely due to the circumstances listed in paragraphs 
(c)(1)-(4) of this section, the covered company will not be subject to 
enforcement actions for a period of 90 days (or such other period 
determined by the Board to be appropriate to preserve the safety and 
soundness of the covered company or U.S. financial stability) if the 
company uses reasonable efforts to return to compliance with this 
subpart during this period. The covered company may not engage in any 
additional credit transactions with such a counterparty in 
contravention of this rule during the compliance period, except in 
cases where the Board determines that such credit transactions are 
necessary or appropriate to preserve the safety and soundness of the 
covered company or U.S. financial stability. In

[[Page 14356]]

granting approval for such a special temporary credit exposure limit, 
the Board will consider the following:
    (1) A decrease in the covered company's capital stock and surplus;
    (2) The merger of the covered company with another covered company;
    (3) A merger of two unaffiliated counterparties; or
    (4) Any other circumstance the Board determines is appropriate.
    (d) Other measures. The Board may impose supervisory oversight and 
reporting measures that it determines are appropriate to monitor 
compliance with this subpart.
0
3. Add subpart Q to read as follows:

Subpart Q--Single-Counterparty Credit Limits

Sec.
252.170 Applicability.
252.171 Definitions.
252.172 Credit exposure limits.
252.173 Gross credit exposure.
252.174 Net credit exposure.
252.175 Investments in and exposures to securitization vehicles, 
investment funds, and other special purpose vehicles.
252.176 Aggregation of exposures to more than one counterparty due 
to economic interdependence or control relationships.
252.177 Exemptions.
252.178 Compliance.

Sec.  252.170  Applicability.

    (a) Foreign banking organizations with total consolidated assets of 
$50 billion or more.
    (1) In general. A foreign banking organization with total 
consolidated assets of $50 billion or more is subject to the general 
credit exposure limit set forth in Sec.  252.173(a).
    (2) Foreign banking organizations with $250 billion or more in 
total consolidated assets or $10 billion or more in total on-balance-
sheet foreign exposures. A foreign banking organization with $250 
billion or more in total consolidated assets or $10 billion or more in 
total on-balance-sheet foreign exposures is subject to the credit 
exposure limit set forth in Sec.  252.172(b).
    (3) Major foreign banking organizations. A foreign banking 
organization with total consolidated assets of $500 billion or more is 
subject to the credit exposure limit set forth in Sec.  252.172(c).
    (4) Total consolidated assets. For purposes of this section, total 
consolidated assets are determined based on:
    (i) The average of the foreign banking organization's total 
consolidated assets in the four most recent consecutive quarters as 
reported quarterly on the FR Y-7Q; or
    (ii) If the foreign banking organization has not filed the FR Y-7Q 
for each of the four most recent consecutive quarters, the average of 
the foreign banking organization's total consolidated assets in the 
most recent consecutive quarters as reported quarterly on the foreign 
banking organization's FR Y-7Qs; or
    (iii) If the foreign banking organization has not yet filed an FR 
Y-7Q, as determined under applicable accounting standards.
    (5) Cessation of requirements. A foreign banking organization will 
remain subject to the requirements of this subpart, including Sec.  
252.172(a) and, as applicable, the credit exposure limits of Sec. Sec.  
252.172(b) and (c), unless and until total assets are less than $50 
billion (with respect to the requirements in paragraphs (a) and (b)) or 
$500 billion (with respect to the requirement in paragraph (c)) for 
each of the four most recent consecutive calendar quarters, either as 
reported on the foreign banking organization's FR Y-7Q or as determined 
under applicable accounting standards, to the extent the foreign 
banking organization has not yet filed an FR Y-7Q.
    (i) Nothing in paragraph (a)(3) shall preclude a company from 
becoming a covered company pursuant to paragraphs (a)(1) or (a)(2) of 
this section.
    (6) Measurement date. For purposes of this section, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (b) U.S. intermediate holding companies.
    (1) In general. A U.S. intermediate holding company is subject to 
the general credit exposure limit set forth in Sec.  252.172(a).
    (2) U.S. intermediate holding companies with $250 billion or more 
in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures. A U.S intermediate holding company 
with $250 billion or more in total consolidated assets or $10 billion 
or more in total on-balance-sheet foreign exposures is subject to the 
credit exposure limit set forth in Sec.  252.172(b).
    (3) Major U.S. intermediate holding companies. A U.S. intermediate 
holding company that has total consolidated assets of $500 billion or 
more is subject to the credit exposure limit set forth in Sec.  
252.172(c)..
    (4) Total consolidated assets. For purposes of this paragraph, 
total consolidated assets are determined based on:
    (i) The average of the total consolidated assets for the four most 
recent consecutive quarters as reported by the U.S. intermediate 
holding company on its FR Y-9C, or
    (ii) If the U.S. intermediate holding company has not filed the FR 
Y-9C for each of the four most recent consecutive quarters, for the 
most recent quarter or consecutive quarters as reported on the FR Y-9C, 
or
    (iii) If the U.S. intermediate holding company has not yet filed an 
FR Y-9C, as determined under applicable accounting standards.
    (5) Cessation of requirements. A major U.S. intermediate holding 
company will remain subject to the requirements of this subpart, 
including Sec.  252.172(a) and, as applicable, the credit exposure 
limits set forth in Sec. Sec.  252.172(b) and (c), unless and until 
total assets are less than $50 billion (with respect to the 
requirements in paragraphs (a) or (b) of this section) or $500 billion 
(with respect to the requirement in paragraph (c) of this section) for 
each of the four most recent consecutive calendar quarters either as 
reported on its FR Y-9C or as determined under applicable accounting 
standards, to the extent the foreign banking organization has not yet 
filed an FR Y-9C.
    (i) Nothing in paragraph (b)(3) shall preclude a company from 
becoming a covered company pursuant to paragraphs (b)(1) or (b)(2) of 
this section.
    (5) Measurement date. For purposes of this section, total 
consolidated assets are measured on the last day of the quarter used in 
calculation of the average.
    (c) Initial applicability.
    (1) Foreign banking organizations. (i) A foreign banking 
organization that is subject to this subpart under paragraph (a)(1) of 
this section as of [INSERT EFFECTIVE DATE], must comply with the 
requirements of this subpart beginning on [INSERT DATE TWO YEARS FROM 
EFFECTIVE DATE], unless that time is extended by the Board in writing.
    (ii) A foreign banking organization that is subject to this subpart 
under paragraphs (a)(2) or (3) of this section as of [INSERT EFFECTIVE 
DATE], must comply with the requirements of this subpart, as 
applicable, beginning on [INSERT DATE ONE YEAR FROM EFFECTIVE DATE].
    (2) U.S. intermediate holding companies. (i) A U.S. intermediate 
holding company that is subject to the requirements of this subpart 
under paragraph (b)(1) of this section as of [INSERT EFFECTIVE DATE], 
must comply with the requirements of this

[[Page 14357]]

subpart beginning on [INSERT DATE TWO YEARS FROM EFFECTIVE DATE], 
unless that time is extended by the Board in writing.
    (ii) A U.S. intermediate holding company that is subject to this 
subpart under paragraphs (b)(2) or (3) of this section as of [INSERT 
EFFECTIVE DATE], must comply with the requirements of this subpart, 
including Sec. Sec.  252.172(b)-(c), beginning on [INSERT DATE ONE YEAR 
FROM EFFECTIVE DATE].
    (3) A foreign banking organization or U.S. intermediate holding 
company that becomes subject to the requirements of this subpart after 
the effective date of the subpart will be subject to the requirements 
of this subpart in accordance with paragraph (d) of this section.
    (d) Ongoing applicability.
    (1) Foreign banking organizations. Except as provided in paragraphs 
(c)(1) or (c)(2) of this section, a foreign banking organization that 
becomes subject to the requirements of this subpart after [INSERT 
EFFECTIVE DATE], must comply with the requirements of this subpart, as 
applicable, beginning on the first day of the fifth calendar quarter 
after it becomes subject to those requirements, unless that time is 
accelerated or extended by the Board in writing.
    (2) U.S. intermediate holding companies. Except as provided in 
paragraph (c)(2) of this section, a U.S. intermediate holding company 
that becomes subject to the requirements of this subpart after [INSERT 
EFFECTIVE DATE], must comply with the requirements of this subpart, as 
applicable, on the later of:
    (i) The first day of the fifth calendar quarter after it becomes 
subject to those requirements, or
    (ii) The date on which the U.S. intermediate holding company is 
required to be established, unless that time is accelerated or extended 
by the Board in writing.


Sec.  252.171  Definitions.

    For purposes of this subpart:
    (a) Adjusted market value means:
    (1) With respect to the value of securities transferred by the 
covered company to a counterparty, the sum of:
    (i) Market value of the securities and
    (ii) The product of the market value of the securities multiplied 
by the applicable collateral haircut in Table 1 to Sec.  217.132 of the 
Board's Regulation Q (12 CFR 217.132); and
    (2) With respect to eligible collateral received by the covered 
company from a counterparty:
    (i) The market value of the securities minus
    (ii) The market value of the securities multiplied by the 
applicable collateral haircut in Table 1 to Sec.  217.132 of the 
Board's Regulation Q (12 CFR 217.132).
    (3) Prior to calculating the adjusted market value pursuant to 
paragraphs (1) and (2) of this section, with regard to a transaction 
that meets the definition of ``repo-style transaction'' in Sec.  217.2 
the Board's Regulation Q (12 CFR 217.2), the covered company would 
first multiply the applicable collateral haircuts in Table 1 to Sec.  
217.132 of the Board's Regulation Q (12 CFR 217.132) by the square root 
of \1/2\.
    (b) Aggregate net credit exposure means the sum of all net credit 
exposures of a covered entity to a single counterparty.
    (c) Bank-eligible investments means investment securities that a 
national bank is permitted to purchase, sell, deal in, underwrite, and 
hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
    (d) Capital stock and surplus means:
    (1) With respect to a U.S. intermediate holding company, the sum of 
the following amounts in each case as reported by a U.S. intermediate 
holding company on the most recent FR Y-9C:
    (i) The tier 1 and tier 2 capital of the U.S. intermediate holding 
company, as calculated under the capital adequacy guidelines applicable 
to that U.S. intermediate holding company under subpart O of the 
Board's Regulation YY (12 CFR part 252); and
    (ii) The excess allowance for loan and lease losses of the U.S. 
intermediate holding company not included in tier 2 capital under the 
capital adequacy guidelines applicable to that U.S. intermediate 
holding company under subpart O of the Board's Regulation YY (12 CFR 
part 252); and
    (2) With respect to a foreign banking organization, the total 
regulatory capital as reported on the foreign banking organization's 
most recent FR Y-7Q or other reporting form specified by the Board.
    (e) Counterparty means:
    (1) With respect to a natural person, the person, and members of 
the person's immediate family;
    (2) With respect to a company, the company and all persons that 
that counterparty
    (i) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the person;
    (ii) Owns or controls 25 percent or more of the total equity of the 
person; or
    (iii) Consolidates for financial reporting purposes, as described 
in Sec.  252.172(d), collectively;
    (3) With respect to a State, the State and all of its agencies, 
instrumentalities, and political subdivisions (including any 
municipalities) collectively;
    (4) With respect to a foreign sovereign entity that is not assigned 
a zero percent risk weight under the standardized approach in the 
Board's Regulation Q (12 CFR part 217, subpart D), the foreign 
sovereign entity and all of its agencies and instrumentalities (but not 
including any political subdivision), collectively; and
    (5) With respect to a political subdivision of a foreign sovereign 
entity such as states, provinces, and municipalities, any political 
subdivisions of a foreign sovereign entity and all such political 
subdivision's agencies and instrumentalities, collectively.
    (f) Covered entity means:
    (1) Any entity that is part of the combined U.S. operations of a 
foreign banking organization with total consolidated assets of $50 
billion or more, calculated pursuant to Sec.  252.170(a), and all of 
its subsidiaries; and
    (2) Any U.S. intermediate holding company of a foreign banking 
organization with total consolidated assets of $50 billion or more, 
calculated pursuant to Sec.  252.170(b), and all of its subsidiaries.
    (g) Credit derivative has the same meaning as in Sec.  217.2 of the 
Board's Regulation Q (12 CFR 217.2).
    (h) Credit transaction means:
    (1) Any extension of credit, including loans, deposits, and lines 
of credit, but excluding uncommitted lines of credit;
    (2) Any repurchase transaction or reverse repurchase transaction;
    (3) Any securities lending or securities borrowing transaction;
    (4) Any guarantee, acceptance, or letter of credit (including any 
endorsement, confirmed letter of credit, or standby letter of credit) 
issued on behalf of a counterparty;
    (5) Any purchase of, or investment in, securities issued by a 
counterparty;
    (6) Any credit exposure to the counterparty in connection with a 
derivative transaction between the covered company and the 
counterparty;
    (7) Any credit exposure to the counterparty in connection with a 
credit derivative or equity derivative transaction between the covered 
company and a third party, the reference asset of which is an 
obligation or equity security of the counterparty; and
    (8) Any transaction that is the functional equivalent of the above, 
and any other similar transaction that the Board, by regulation, 
determines to be a credit transaction for purposes of this subpart.

[[Page 14358]]

    (i) Depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (j) Derivative transaction means any transaction that is a 
contract, agreement, swap, warrant, note, or option that is based, in 
whole or in part, on the value of, any interest in, or any quantitative 
measure or the occurrence of any event relating to, one or more 
commodities, securities, currencies, interest or other rates, indices, 
or other assets.
    (k) Eligible collateral means collateral in which a U.S. 
intermediate holding company or any part of the foreign banking 
organization's combined U.S. operations has a perfected, first priority 
security interest or the legal equivalent thereof, if outside of the 
United States (with the exception of cash on deposit and 
notwithstanding the prior security interest of any custodial agent) and 
is in the form of:
    (1) Cash on deposit with the U.S. intermediate holding company or 
any part of the U.S. operations, the U.S. branch, or the U.S. agency 
(including cash held for the foreign banking organization or U.S. 
intermediate holding company by a third-party custodian or trustee);
    (2) Debt securities (other than mortgage- or asset-backed 
securities and resecuritization securities, unless those securities are 
issued by a U.S. government-sponsored enterprise) that are bank-
eligible investments and that are investment grade;
    (3) Equity securities that are publicly traded; or
    (4) Convertible bonds that are publicly traded; and
    (5) Does not include any debt or equity securities (including 
convertible bonds), issued by an affiliate of the U.S. intermediate 
holding company or by any part of the foreign banking organization's 
combined U.S. operations.
    (l) Eligible credit derivative means a single-name credit 
derivative or a standard, non-tranched index credit derivative, 
provided that:
    (1) The derivative contract is subject to an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties;
    (3) If the credit derivative is a credit default swap, the 
derivative contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that 
is closely in line with the grace period of the reference exposure; and
    (ii) Receivership, insolvency, liquidation, conservatorship, or 
inability of the reference exposure issuer to pay its debts, or its 
failure or admission in writing of its inability generally to pay its 
debts as they become due and similar events;
    (4) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event 
valuations of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer 
an exposure to the protection provider at settlement, the terms of at 
least one of the exposures that is permitted to be transferred under 
the contract provides that any required consent to transfer may not be 
unreasonably withheld; and
    (7) If the credit derivative is a credit default swap, the contract 
clearly identifies the parties responsible for determining whether a 
credit event has occurred, specifies that this determination is not the 
sole responsibility of the protection provider, and gives the 
protection purchaser the right to notify the protection provider of the 
occurrence of a credit event.
    (m) Eligible equity derivative means an equity-linked total return 
swap, provided that:
    (1) The derivative contract has been confirmed by the 
counterparties;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties; and
    (3) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract.
    (n) Eligible guarantee has the same meaning as in Sec.  217.2 of 
the Board's Regulation Q (12 CFR 217.2) that is provided by an eligible 
protection provider.
    (o) Eligible protection provider has the same meaning as ``eligible 
guarantor'' in Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2), 
but does not include the foreign banking organization or any entity 
that is an affiliate of either the U.S. intermediate holding company or 
of any part of the foreign banking organization's combined U.S. 
operations.
    (p) Equity derivative has the same meaning as ``equity derivative 
contract'' in Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (q) Financial entity means:
    (1) A depository institution;
    (2) A bank holding company;
    (3) A savings and loan holding company (as defined in 12 U.S.C. 
1467a);
    (4) A securities broker or dealer registered with the U.S. 
Securities and Exchange Commission under the Securities Exchange Act of 
1934 (15 U.S.C. 78o et seq.);
    (5) An insurance company that is subject to the supervision by a 
State insurance regulator;
    (6) A foreign banking organization;
    (7) A non-U.S.-based securities firm or a non-U.S.-based insurance 
company that is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies;
    (8) A central counterparty; and
    (9) A legal entity whose main business includes the management of 
financial assets, lending, factoring, leasing, provision of credit 
enhancements, securitization, investments, financial custody, 
proprietary trading, and other financial services.
    (r) Gross credit exposure means, with respect to any credit 
transaction, the credit exposure of the covered company before 
adjusting, pursuant to section 252.174, for the effect of any 
qualifying master netting agreement, eligible collateral, eligible 
guarantee, eligible credit derivative, eligible equity derivative, 
other eligible hedge, and any unused portion of certain extensions of 
credit.
    (s) Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    (t) Intraday credit exposure means credit exposure of the U.S. 
intermediate holding company or any part of the combined U.S. 
operations to a counterparty that by its terms is to be repaid, sold, 
or terminated by the end of its business day in the United States.
    (u) Investment grade has the same meaning as in Sec.  217.2 of the 
Board's Regulation Q (12 CFR 217.2).
    (v) Major counterparty means:
    (1) A U.S. company identified as a global systemically important 
bank holding company pursuant to 12 CFR 217.402;
    (2) Any foreign banking organization (and all of its subsidiaries, 
collectively) that meets one of the following conditions:
    (i) The foreign banking organization has the characteristics of a 
global

[[Page 14359]]

systemically important banking organization under the assessment 
methodology and the higher loss absorbency requirement for global 
systemically important banks issued by the Basel Committee on Banking 
Supervision, as updated from time to time; or
    (ii) The Board, using information reported by the foreign banking 
organization or its U.S. subsidiaries, information that is publicly 
available, and confidential supervisory information, determines:
    (A) That the foreign banking organization would be a global 
systemically important banking organization under the global 
methodology;
    (B) That the foreign banking organization, if it were subject to 
the Board's Regulation Q, would be identified as a global systemically 
important bank holding company under Sec.  217.402 of the Board's 
Regulation Q; or
    (C) That the U.S. intermediate holding company, if it were subject 
to the Board's Regulation Q, would be identified as a global 
systemically important bank holding company.
    (iii) A foreign banking organization that prepares or reports for 
any purpose the indicator amounts necessary to determine whether the 
foreign banking organization is a global systemically important banking 
organization under the assessment methodology and the higher loss 
absorbency requirement for global systemically important banks issued 
by the Basel Committee on Banking Supervision, as updated from time to 
time, must use the data to determine whether the foreign banking 
organization has the characteristics of a global systemically important 
banking organization under the global methodology; and
    (3) Any nonbank financial company supervised by the Board.
    (w) Major foreign banking organization means any foreign banking 
organization that has total consolidated assets of $500 billion or 
more, calculated pursuant to Sec.  252.170(a)(4).
    (x) Major U.S. intermediate holding company means a U.S. 
intermediate holding company that has total consolidated assets of $500 
billion or more, calculated pursuant to Sec.  252.170(b)(3).
    (y) Net credit exposure means, with respect to any credit 
transaction, the gross credit exposure of a covered company calculated 
under Sec.  252.173, as adjusted in accordance with Sec.  252.174.
    (z) Qualifying central counterparty has the same meaning as in 
Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (aa) Qualifying master netting agreement has the same meaning as in 
Sec.  217.2 of the Board's Regulation Q (12 CFR 217.2).
    (bb) Short sale means any sale of a security which the seller does 
not own or any sale which is consummated by the delivery of a security 
borrowed by, or for the account of, the seller.
    (cc) Sovereign entity means a central national government 
(including the U.S. government) or an agency, department, ministry, or 
central bank, but not including any political governmental subdivision 
such as a state, province, or municipality.
    (dd) Subsidiary of a specified company means a company that is 
directly or indirectly controlled by the specified company.
    (ee) Tier 1 capital means common equity tier 1 capital and 
additional tier 1 capital, as defined in subpart O of the Board's 
Regulation YY (12 CFR part 252).


Sec.  252.172  Credit exposure limits.

    (a) General limit on aggregate net credit exposure.
    (1) No U.S. intermediate holding company shall have an aggregate 
net credit exposure to any unaffiliated counterparty in excess of 25 
percent of the consolidated capital stock and surplus of the U.S. 
intermediate holding company.
    (2) No foreign banking organization may permit its combined U.S. 
operations, including, but not limited to, any U.S. intermediate 
holding company and any subsidiary of any U.S. intermediate holding 
company, to have an aggregate net credit exposure to any unaffiliated 
counterparty in excess of 25 percent of the consolidated capital stock 
and surplus of the foreign banking organization.
    (b) Limit on aggregate net credit exposure for U.S. intermediate 
holding companies and foreign banking organizations with $250 billion 
or more in total consolidated assets or $10 billion or more in total 
on-balance-sheet foreign exposures.
    (1) No U.S. intermediate holding company that has $250 billion or 
more in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures shall have an aggregate net credit 
exposure to any unaffiliated counterparty that exceeds 25 percent of 
the tier 1 capital of the U.S. intermediate holding company.
    (2) No foreign banking organization that has $250 billion or more 
in total consolidated assets or $10 billion or more in total on-
balance-sheet foreign exposures shall permit its combined U.S. 
operations, including, but not limited to, any U.S. intermediate 
holding company and any subsidiary of any U.S. intermediate holding 
company, to have an aggregate net credit exposure to any unaffiliated 
counterparty in excess of 25 percent of the tier 1 capital of the 
foreign banking organization.
    (c) Major U.S. intermediate holding company and major foreign 
banking organization limits on aggregate net credit exposure to each 
other.
    (1) No U.S. intermediate holding company shall have an aggregate 
net credit exposure to any unaffiliated major counterparty in excess of 
15 percent of the tier 1 capital of the U.S. intermediate holding 
company.
    (2) No major foreign banking organization may permit its combined 
U.S. operations to have an aggregate net credit exposure to any 
unaffiliated major counterparty in excess of 15 percent of the tier 1 
capital of the major foreign banking organization.
    (d) For purposes of this subpart, a counterparty and major 
counterparty shall include any person that the counterparty or major 
counterparty:
    (1) owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the person;
    (2) owns or controls 25 percent or more of the total equity of the 
person; or
    (3) consolidates for financial reporting purposes.


Sec.  252.173  Gross credit exposure.

    (a) Calculation of gross credit exposure for U.S. intermediate 
holding companies and foreign banking organizations. Except as provided 
in paragraph (b) of this section, the amount of gross credit exposure 
of a U.S. intermediate holding company or, with respect to any part of 
its combined U.S. operations, a foreign banking organization (each a 
covered entity), to a counterparty is, in the case of:
    (1) Loans by a covered entity to a counterparty and leases in which 
a covered entity is the lessor and a counterparty is the lessee, an 
amount equal to the amount owed by the counterparty to the covered 
entity under the transaction.
    (2) Debt securities held by a covered entity that is issued by the 
counterparty, equal to:
    (i) The market value, for trading and available-for-sale 
securities; and
    (ii) The amortized purchase price, for securities held to maturity.
    (3) Equity securities held by a covered entity that is issued by 
the counterparty, equal to the market value.
    (4) Repurchase transactions, equal to the adjusted market value of 
securities

[[Page 14360]]

transferred by a covered entity to the counterparty.
    (5) Reverse repurchase transactions, equal to the amount of cash 
transferred by the covered company to the counterparty.
    (6) Securities borrowing transactions, equal to:
    (i) The amount of cash collateral transferred by the covered entity 
to the counterparty; plus
    (ii) The adjusted market value of securities collateral transferred 
by the covered entity to the counterparty.
    (7) Securities lending transactions, equal to the adjusted market 
value of securities lent by the covered entity to the counterparty.
    (8) Committed credit lines extended by a covered entity to a 
counterparty, equal to the face amount of the credit line.
    (9) Guarantees and letters of credit issued by a covered entity on 
behalf of a counterparty, equal to the maximum potential loss to the 
covered entity on the transaction.
    (10) Derivative transactions between the covered entity and the 
counterparty that is not subject to a qualifying master netting 
agreement:
    (i) The derivative transaction shall be valued at an amount equal 
to the sum of:
    (A) The current exposure of the derivatives contract equal to the 
greater of the mark-to-market value of the derivative contract or zero; 
and
    (B) The potential future exposure of the derivatives contract, 
calculated by multiplying the notional principal amount of the 
derivative contract by the applicable conversion factor in Table 2 to 
Sec.  217.132 of the Board's Regulation Q (12 CFR 217.132).
    (ii) In cases where a covered entity is required to recognize an 
exposure to an eligible protection provider pursuant to section 
252.174(e), the covered entity must exclude the relevant derivative 
transaction when calculating its gross exposure to the original 
counterparty under this section.
    (11) Derivative transactions:
    (i) Between a U.S. intermediate holding company and a counterparty 
that is subject to a qualifying master netting agreement:
    (A) The derivative transaction shall be valued using any of the 
methods that the U.S. intermediate holding company is authorized to use 
under the Board's Regulation Q (12 CFR part 217, subparts D and E) to 
value such transactions (provided that the rules governing the 
recognition of collateral set forth in this subpart shall apply).
    (B) In cases where the U.S. intermediate holding company is 
required to recognize an exposure to an eligible protection provider 
pursuant to section 252.174(e), the U.S. intermediate holding company 
must exclude the relevant derivative transaction when calculating its 
gross exposure to the original counterparty under this section.
    (ii) Between an entity within the combined U.S. operations of a 
foreign banking organization and a counterparty that is subject to a 
qualifying master netting agreement between an entity within the 
combined U.S. operations and the counterparty:
    (A) The derivative transaction shall be valued at an amount equal 
to either (1) the exposure at default amount calculated under any of 
the methods that the covered company is authorized to use under the 
Board's Regulation Q (12 CFR part 217, subparts D and E) to value such 
transactions (provided that the rules governing the recognition of 
collateral set forth in this subpart shall apply); or (2) the gross 
credit exposure amount calculated under Sec.  252.173(a)(10) of this 
subpart.
    (B) In cases where, the foreign banking organization is required to 
recognize an exposure to an eligible protection provider pursuant to 
Sec.  252.174(e), the foreign banking organization must exclude the 
relevant derivative transaction when calculating its gross exposure to 
the original counterparty under this section.
    (12) Credit or equity derivative transactions between the covered 
entity and a third party where the covered entity is the protection 
provider and the reference asset is an obligation or equity security of 
the counterparty, equal to the maximum potential loss to the covered 
entity on the transaction.
    (b) Investments in and Exposures to Securitization Vehicles, 
Investment Funds, and Other Special Purpose Vehicles. A U.S. 
intermediate holding company or a foreign banking organization that has 
$250 billion or more in total consolidated assets or $10 billion or 
more in total on-balance-sheet foreign exposures shall calculate its 
gross credit exposure for investments in and exposures to a 
securitization vehicle, investment fund, and other special purpose 
vehicle pursuant to Sec.  252.175.
    (c) Attribution rule. A U.S. intermediate holding company or, with 
respect to its combined U.S. operations, a foreign banking organization 
must treat any credit transaction with any person as a credit 
transaction with a counterparty, to the extent that the proceeds of the 
transaction are used for the benefit of, or transferred to, that 
counterparty.


Sec.  252.174  Net credit exposure.

    (a) In general. For purposes of this subpart, a U.S. intermediate 
holding company, or with respect to its combined U.S. operations, a 
foreign banking organization, shall calculate its net credit exposure 
to a counterparty by adjusting its gross credit exposure to that 
counterparty in accordance with the rules set forth in this section.
    (b) Calculation of net credit exposure for repurchase transactions, 
reverse repurchase transactions, securities lending transactions, and 
securities borrowing transactions. With respect to any repurchase 
transaction, reverse repurchase transaction, securities lending 
transaction, and securities borrowing transaction with a counterparty 
that is subject to a bilateral netting agreement with that counterparty 
and that meets the definition of ``repo-style transaction'' in section 
217.2 of the Board's Regulation Q (12 CFR 217.2), the net credit 
exposure of a U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization to a 
counterparty shall be equal to the exposure at default amount 
calculated under Sec.  217.37(c)(2) of the Board's Regulation Q (12 CFR 
217.37(c)(2)); provided that:
    (1) The U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization shall apply 
the standardized supervisory haircuts as provided in 12 CFR 
217.37(c)(3)(iii) of the Board's Regulation (12 CFR 217.37(c)(3)(iii), 
and is not permitted to use its own internal estimates for haircuts;
    (2) The U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization shall, in 
calculating its net credit exposure to a counterparty as a result of 
the transactions described in paragraph (b), disregard any collateral 
received from that counterparty that does not meet the definition of 
``eligible collateral'' in Sec.  252.171(k); and
    (3) The U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization shall include 
the adjusted market value of any eligible collateral, as further 
adjusted by the application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q (12 CFR 
217.36(d)), if applicable, when calculating its gross credit exposure 
to the collateral issuer, including in instances where the underlying 
repurchase transaction, reverse repurchase transaction, securities

[[Page 14361]]

lending transaction, or securities borrowing transaction would not be 
subject to the credit limits of Sec.  272.172.
    (c) Eligible collateral.
    (1) In computing its net credit exposure to a counterparty for any 
credit transaction other than transactions described in paragraph (b) 
of this section, a U.S. intermediate holding company or, with respect 
to its combined U.S. operations, a foreign banking organization must 
reduce its gross credit exposure on the transaction by:
    (i) The adjusted market value of any eligible collateral, in cases 
where the eligible collateral has the same or greater maturity as the 
credit transactions; or
    (ii) The adjusted market value of any eligible collateral, as 
further adjusted by application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q (12 CFR 
217.36(d)), but only if the eligible collateral has an original 
maturity equal to or greater than one year and a residual maturity of 
not less than three months, in cases where the eligible collateral has 
a shorter maturity than the credit transaction.
    (2) A U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization that reduces 
its gross credit exposure to a counterparty as required under paragraph 
(c)(1) must include the adjusted market value of the eligible 
collateral, as further adjusted by the application of the maturity 
mismatch adjustment approach of Sec.  217.36(d) of the Board's 
Regulation Q (12 CFR 217.36(d)), if applicable, when calculating its 
gross credit exposure to the collateral issuer, including in instances 
where the underlying credit transaction would not be subject to the 
credit limits of Sec.  272.172. Notwithstanding the foregoing, in no 
event will the gross credit exposure of the U.S. intermediate holding 
company or, with respect to its combined U.S. operations, of the 
foreign banking organization to the issuer of collateral be in excess 
of its gross credit exposure to the counterparty on the credit 
transaction.
    (d) Eligible guarantees.
    (1) In calculating net credit exposure to a counterparty for any 
credit transaction, a U.S. intermediate holding company or, with 
respect to its combined U.S. operations, a foreign banking organization 
must reduce its gross credit exposure to the counterparty by any 
eligible guarantees from an eligible protection provider that covers 
the transaction by:
    (i) The amount of any eligible guarantees from an eligible 
protection provider that covers the transaction, in cases where the 
eligible guarantee has the same or greater maturity as the credit 
transaction; or
    (ii) The amount of any eligible guarantees from an eligible 
protection provider that covers the transaction as further adjusted by 
application of the maturity mismatch adjustment approach of Sec.  
217.36(d) of the Board's Regulation Q (12 CFR 217.36(d)), if the 
eligible guarantees have an original maturity equal to or greater than 
one year and a residual maturity of not less than three months, in 
cases where the eligible guarantee has a shorter maturity than the 
credit transaction.
    (2) A U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization that reduces 
its gross credit exposure to a counterparty as required under paragraph 
(d)(1) must include the amount of eligible guarantees when calculating 
its gross credit exposure to the eligible protection provider, 
including in instances where the underlying credit transaction would 
not be subject to the credit limits of Sec.  272.172. Notwithstanding 
the foregoing, in no event will the gross credit exposure of the U.S. 
intermediate holding company or, with respect to its combined U.S. 
operations, of the foreign banking organization to an eligible 
protection provider with respect to an eligible guarantee be in excess 
of its gross credit exposure to the counterparty on the credit 
transaction prior to recognition of the eligible guarantee.
    (e) Eligible credit and equity derivatives.
    (1) In calculating net credit exposure to a counterparty for a 
credit transaction, a U.S. intermediate holding company or, with 
respect to its combined U.S. operations, a foreign banking organization 
must reduce its gross credit exposure to the counterparty by:
    (i) The notional amount of any eligible credit or equity derivative 
from an eligible protection provider, in cases where the eligible 
credit or equity derivative has a maturity that is the same or greater 
than the maturity of the credit transaction; or
    (ii) The notional amount of any eligible credit or equity 
derivative from an eligible protection provider, as further adjusted by 
application of the maturity mismatch adjustment approach of Sec.  
217.36(d) of the Board's Regulation Q (12 CFR 217.36(d)), but only if 
the eligible credit or equity derivative has an original maturity equal 
to or greater than one year and a residual maturity of not less than 
three months, in cases where the eligible credit or equity derivative 
has a shorter maturity than the credit transaction.
    (2)(i) In general, a U.S. intermediate holding company or, with 
respect to its combined U.S. operations, a foreign banking organization 
that reduces its gross credit exposure to a counterparty as provided 
under paragraph (e)(1) must include the notional amount of the eligible 
credit or equity derivative from an eligible protection provider, as 
further adjusted by the application of the maturity mismatch adjustment 
approach of Sec.  217.36(d) of the Board's Regulation Q (12 CFR 
217.36(d)), as applicable, when calculating its gross credit exposure 
to the eligible protection provider, including in instances where the 
underlying credit transaction would not be subject to the credit limits 
of Sec.  272.172. Notwithstanding the foregoing, in no event will the 
gross credit exposure of the U.S. intermediate holding company or, with 
respect to its combined U.S. operations, of the foreign banking 
organization to an eligible provider with respect to an eligible credit 
or equity derivative be in excess of its gross credit exposure to that 
counterparty on the credit transaction prior to recognition of the 
eligible credit or equity derivative; and
    (ii) In cases where the eligible credit or equity derivative is 
used to hedge covered positions and available-for-sale exposures that 
are subject to the Board's market risk rule (12 CFR part 217, subpart 
F) and the counterparty on the hedged transaction is not a financial 
entity, the amount of credit exposure that a company must recognize to 
the eligible protection provider is the amount that would be calculated 
pursuant to Sec.  252.173(a), including in instances where the 
underlying credit transaction would not be subject to the credit limits 
of Sec.  272.172.
    (f) Other eligible hedges. In calculating net credit exposure to a 
counterparty for a credit transaction, a U.S. intermediate holding 
company or, with respect to its combined U.S. operations, a foreign 
banking organization may reduce its gross credit exposure to the 
counterparty by the face amount of a short sale of the counterparty's 
debt or equity security, provided that:
    (1) The instrument in which the covered company has a short 
position is junior to, or pari passu with, the instrument in which the 
covered company has the long position; and
    (2) The instrument in which the covered company has a short 
position and the instrument in which the

[[Page 14362]]

covered company has the long position are either both treated as 
trading or available-for-sale exposures or both treated as held-to-
maturity exposures.
    (g) Unused portion of certain extensions of credit.
    (1) In computing its net credit exposure to a counterparty for a 
credit line or revolving credit facility, a U.S. intermediate holding 
company or, with respect to its combined U.S. operations, a foreign 
banking organization may reduce its gross credit exposure by the amount 
of the unused portion of the credit extension to the extent that the 
U.S. intermediate holding company or any part of the combined U.S. 
operations of the foreign banking organization does not have any legal 
obligation to advance additional funds under the extension of credit, 
until the counterparty provides the amount of adjusted market value of 
collateral of the type described in paragraph (g)(2) of this section in 
the amount (calculated in accordance with Sec.  252.171 of this 
subpart) required with respect to the entire used portion of the 
extension of credit.
    (2) To qualify for this reduction, the credit contract must specify 
that any used portion of the credit extension must be fully secured by 
collateral that is:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations directly and fully guaranteed as to principal and 
interest by, the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation, while operating under the 
conservatorship or receivership of the Federal Housing Finance Agency, 
and any additional obligations issued by a U.S. government-sponsored 
enterprise as determined by the Board; or
    (iv) Obligations of the foreign banking organization's home country 
sovereign entity.
    (h) Credit transactions involving exempt and excluded persons. If a 
U.S. intermediate holding company or, with respect to its combined U.S. 
operations, a foreign banking organization has a credit transaction 
with any person, exposures to which are exempt from this subpart under 
Sec.  252.175 or otherwise excluded from the limits in this subpart, 
and the U.S. intermediate holding company or foreign banking 
organization has reduced its credit exposure on the credit transaction 
with that person by obtaining collateral from that person or a 
guarantee or credit or equity derivative from an eligible protection 
provider, the U.S. intermediate holding company or foreign banking 
organization shall calculate its credit exposure to the issuer of the 
collateral or protection provider, as applicable, in accordance with 
the rules set forth in this section to the same extent as if the credit 
transaction with the person were subject to the requirements in this 
subpart, including Sec.  252.172.


Sec.  252.175  Investments in and exposures to securitization vehicles, 
investment funds, and other special purpose vehicles.

    (a) In general. (1) This section applies only to covered entities 
with $250 billion or more in total consolidated assets or $10 billion 
or more in on-balance-sheet foreign exposures, subject to paragraph (d) 
of this section.
    (2)(i) If a covered entity can satisfy the requirements of 
paragraph (a)(3), a covered company must calculate its gross credit 
exposure to each securitization vehicle, investment fund, and other 
special purpose vehicle in which it invests pursuant to Sec.  
252.173(a), and the covered entity is not required to calculate its 
gross credit exposure to each issuer of assets held by a securitization 
vehicle, investment fund, or other special purpose vehicle.
    (ii) If a covered entity cannot satisfy the requirements of 
paragraph (a)(3), the covered entity must calculate its gross credit 
exposure to each issuer of assets held by a securitization vehicle, 
investment fund, or other special purpose vehicle using the look-
through approach in paragraph (b) of this section.
    (2) A covered entity is not required to calculate its gross credit 
exposure to each issuer of assets held by a securitization vehicle, 
investment fund, or other special purpose vehicle, as applicable, if 
the covered entity can demonstrate that its gross credit exposure to 
each such issuer, considering only the credit exposures to that issuer 
arising from the covered entity's investment in a particular 
securitization vehicle, investment fund, or other special purpose 
vehicle, is less than 0.25 percent of the covered entity's:
    (i) Capital stock and surplus in the case of a covered entity 
subject to the credit exposure limit of Sec.  252.172(a); or
    (ii) Tier 1 capital in the case of a covered company subject to the 
credit exposure limit of Sec.  252.172(b).
    (b) Look-Through Approach. (1) A covered entity that cannot satisfy 
the requirements of paragraph (a)(3) must calculate its gross credit 
exposure, for purposes of Sec.  252.173(a), to each issuer of assets 
held by a securitization vehicle, investment fund, or other special 
purpose vehicle, pursuant to paragraph (b)(3) of this section.
    (2) If a covered entity that cannot satisfy the requirements of 
paragraph (a)(3) is unable to identify each issuer of assets held by a 
securitization vehicle, investment fund, or other special purpose 
vehicle, the covered entity, for purposes of paragraph (b)(3) of this 
section, must attribute the gross credit exposure to a single unknown 
counterparty, and the limits of Sec.  252.172 shall apply to that 
counterparty as a single counterparty.
    (3) A covered entity that is required to calculate its gross credit 
exposure to an issuer of assets held by a securitization vehicle, 
investment fund, or other special purpose vehicle pursuant to paragraph 
(b)(1), or to an unknown counterparty pursuant to paragraph (b)(2), 
must calculate the gross credit exposure as follows:
    (i) Where all investors in the securitization vehicle, investment 
fund, or other special purpose vehicle rank pari passu, the gross 
credit exposure is equal to the covered entity's pro rata share 
multiplied by the value of the assets attributed to the issuer or the 
unknown counterparty, as applicable, that are held within the 
structure; and
    (ii) Where all investors in the securitization vehicle, investment 
fund, or other special purpose vehicle do not rank pari passu, the 
gross credit exposure is equal to:
    (A) The lower of the value of the tranche in which the covered 
entity has invested, calculated pursuant to Sec.  252.173(a), and the 
value of each asset attributed to the issuer or the unknown 
counterparty, as applicable, that are held by the securitization 
vehicle, investment fund, or other special purpose vehicle; multiplied 
by
    (B) The pro rata share of the covered entity's investment in the 
tranche.
    (c) Exposures to Third Parties. (1) Notwithstanding any other 
requirement in this section, a covered entity must recognize, for 
purposes of this subpart, a gross credit exposure to each third party 
that has a contractual or other business relationship with a 
securitization vehicle, investment fund, or other special purpose 
vehicle, such as a fund manager or protection provider, whose failure 
or material financial distress would cause a loss in the value of the 
covered entity's investment in or exposure to the securitization 
vehicle, investment fund, or other special purpose vehicle.
    (2) For purposes of Sec.  252.172, with respect to a covered 
entity's gross credit exposure to a third party that a covered entity 
must recognize pursuant to paragraph (c)(1), the covered entity shall

[[Page 14363]]

recognize an exposure to the third party in an amount equal to the 
covered entity's gross credit exposure to the associated securitization 
vehicle, investment fund, or other special purpose vehicle, in addition 
to the covered entity's gross credit exposure to the associated 
securitization vehicle, investment fund, or other special purpose 
vehicle.
    (d) Notwithstanding paragraph (a)(1) of this section, in order to 
avoid evasion of this subpart, the Board may determine, after notice to 
the covered entity and opportunity for hearing, that a covered entity 
with less than $250 billion in total consolidated assets and less than 
$10 billion in total on-balance-sheet foreign exposures must apply the 
look-through approach or recognize exposures to third parties that have 
a contractual or other business relationship for purposes of this 
subpart.


Sec.  252.176  Aggregation of exposures to more than one counterparty 
due to economic interdependence or control relationships.

    (a) Aggregation of Exposures to More than One Counterparty due to 
Economic Interdependence.
    (1)(i) If a U.S. intermediate holding company or, with respect to 
its combined U.S. operations, a foreign banking organization that has 
less than $250 billion in total consolidated assets and less than $10 
billion in total on-balance-sheet foreign exposures has an aggregate 
net credit exposure to any unaffiliated counterparty that exceeds 5 
percent of the consolidated capital stock and surplus of the covered 
company, or 5 percent of its tier 1 capital in the case of a U.S. 
intermediate holding company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures, the U.S. intermediate holding company or, with 
respect to its combined U.S. operations, the foreign banking 
organization shall analyze its relationship with the unaffiliated 
counterparty under paragraph (a)(2) of this section to determine 
whether the unaffiliated counterparty is economically interdependent 
with one or more other unaffiliated counterparties of the covered 
company.
    (ii) For purposes of this paragraph, two counterparties are 
economically interdependent if the failure, default, insolvency, or 
material financial distress of one counterparty would cause the 
failure, default, insolvency, or material financial distress of the 
other counterparty, taking into account the factors in paragraph (a)(2) 
of this section.
    (iii) If a U.S. intermediate holding company or, with respect to 
its combined U.S. operations, a foreign banking organization or the 
Board determines pursuant to paragraph (a)(2) or (a)(3) of this 
section, as applicable, that one or more other unaffiliated 
counterparties of a U.S. intermediate holding company or, with respect 
to its combined U.S. operations, of a foreign banking organization are 
economically dependent, the U.S. intermediate holding company or, with 
respect to its combined U.S. operations, the foreign banking 
organization shall aggregate its net credit exposure to the 
unaffiliated counterparties for all purposes under this subpart, 
including but not limited to Sec.  252.172.
    (2) In making a determination as to whether any two counterparties 
are economically interdependent, a U.S. intermediate holding company 
or, with respect to its combined U.S. operations, a foreign banking 
organization shall consider the following factors:
    (i) Whether 50 percent or more of one counterparty's gross revenue 
or gross expenditures are derived from transactions with the other 
counterparty;
    (ii) Whether one counterparty (counterparty A) has fully or partly 
guaranteed the credit exposure of the other counterparty (counterparty 
B), or is liable by other means, and the credit exposure is significant 
enough that counterparty B is likely to default if presented with a 
claim relating to the guarantee or liability;
    (iii) Whether 25 percent or more of one counterparty's production 
or output is sold to the other counterparty, which cannot easily be 
replaced by other customers;
    (iv) Whether the expected source of funds to repay any credit 
exposure between the counterparties is the same and at least one of the 
counterparties does not have another source of income from which the 
extension of credit may be fully repaid;
    (v) Whether the financial distress of one counterparty 
(counterparty A) is likely to impair the ability of the other 
counterparty (counterparty B) to fully and timely repay counterparty 
B's liabilities;
    (vi) Whether one counterparty (counterparty A) has made a loan to 
the other counterparty (counterparty B) and is relying on repayment of 
that loan in order to satisfy its obligations to the covered company, 
and counterparty A does not have another source of income that it can 
use to satisfy its obligations to the covered company; and
    (vii) Any other indicia of interdependence that the covered company 
determines to be relevant to this analysis.
    (3) In order to avoid evasion of this section, the Board may 
determine, after notice to the company and opportunity for hearing, 
that one or more unaffiliated counterparties of a U.S. intermediate 
holding company or, with respect to its combined U.S. operations, of a 
foreign banking organization are economically dependent for purposes of 
this subpart. In making any such determination, the Board shall 
consider the factors in paragraph (a)(2) of this section as well as any 
other indicia of economic interdependence that the Board determines to 
be relevant.
    (b) Aggregation of exposures to more than one counterparty due to 
certain control relationships.
    (1) A U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization shall assess 
whether counterparties are connected by control relationships due to 
the following factors:
    (i) The presence of voting agreements;
    (ii) Ability of one counterparty to significantly influence the 
appointment or dismissal of another counterparty's administrative, 
management or governing body, or the fact that a majority of members of 
such body have been appointed solely as a result of the exercise of the 
first counterparty's voting rights; and
    (iii) Ability of one counterparty to exercise a controlling 
influence over the management or policies of another counterparty.
    (2) If a U.S. intermediate holding company or, with respect to its 
combined U.S. operations, a foreign banking organization or the Board 
determines pursuant to paragraph (b)(1) or (b)(3) of this section that 
one or more other unaffiliated counterparties of the U.S. intermediate 
holding company or, with respect to its combined U.S. operations, of 
the foreign banking organization are connected by control 
relationships, the U.S. intermediate holding company or, with respect 
to its combined U.S. operations, the foreign banking organization shall 
aggregate its net credit exposure to the unaffiliated counterparties 
for all purposes under this subpart, including but not limited to, 
Sec.  252.172.
    (3) In order to avoid evasion of this section, the Board may 
determine, after notice to the company and opportunity for hearing, 
that one or more unaffiliated counterparties of a U.S. intermediate 
holding company or, with respect to its combined U.S. operations, of a 
foreign banking organization are connected by control relationships for

[[Page 14364]]

purposes of this subpart. In making any such determination, the Board 
shall consider the factors in paragraph (b)(1) of this section as well 
as any other control relationships that the Board determines to be 
relevant.


Sec.  252.177  Exemptions.

    (a) Exempted exposure categories. The following categories of 
credit transactions are exempt from the limits on credit exposure under 
this subpart:
    (1) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation, only while operating under the conservatorship or 
receivership of the Federal Housing Finance Agency, and any additional 
obligations issued by a U.S. government-sponsored entity as determined 
by the Board.
    (2) Intraday credit exposure to a counterparty.
    (3) Trade exposures to a qualifying central counterparty related to 
the covered entity's clearing activity, including potential future 
exposure arising from transactions cleared by the qualifying central 
counterparty and pre-funded default fund contributions.
    (4) Direct claims on, and the portions of claims that are directly 
and fully guaranteed as to principal and interest by, the foreign 
banking organization's home country sovereign entity, notwithstanding 
the risk weight assigned to that sovereign entity under the Board's 
Regulation Q (12 CFR part 217).
    (5) Any transaction that the Board exempts if the Board finds that 
such exemption is in the public interest and consistent with the 
purpose of this section.
    (b) Additional Exemptions by the Board. The Board may, by 
regulation or order, exempt transactions, in whole or in part, from the 
definition of the term ``credit exposure,'' if the Board finds that the 
exemption is in the public interest and is consistent with the purpose 
of Sec.  165(e) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5365(e)).


Sec.  252.178  Compliance.

    (a) Scope of compliance. A foreign banking organization or U.S. 
intermediate holding company with $250 billion or more in total 
consolidated assets or $10 billion or more in total on-balance-sheet 
foreign exposures must ensure its compliance with the requirements of 
this section on a daily basis at the end of each business day and 
submit to the Board on a monthly basis a report demonstrating its daily 
compliance. A foreign banking organization or U.S. intermediate holding 
company with less than $250 billion in total consolidated assets or $10 
billion in total on-balance-sheet foreign exposures must comply with 
the requirements of this section on a quarterly basis and submit on a 
quarterly basis a report demonstrating its quarterly compliance, unless 
the Board determines and notifies that company that more frequent 
compliance and reporting is required.
    (b) Qualifying Master Netting Agreement. A foreign banking 
organization must ensure that its U.S. intermediate holding company and 
combined U.S. operations establish and maintain procedures that meet or 
exceed the requirements of Sec.  217.3(d) of the Board's Regulation Q 
(12 CFR 217.3(d)) to monitor possible changes in relevant law and to 
ensure that the agreement continues to satisfy the requirements of a 
qualifying master netting agreement.
    (c) Noncompliance. Except as otherwise provided in this section, 
either the U.S. intermediate holding company or the foreign banking 
organization is not in compliance with this subpart solely due to the 
circumstances listed in Sec. Sec.  252.178(c) (1)-(4) below, the 
covered entity will not be subject to enforcement actions for a period 
of 90 days (or such other period determined by the Board to be 
appropriate to preserve the safety and soundness of the covered company 
or U.S. financial stability) if the covered entity uses reasonable 
efforts to return to compliance with this subpart during this period. 
Neither the U.S. intermediate holding company nor the combined U.S. 
operations may engage in any additional credit transactions with such a 
counterparty in contravention of this subpart, unless the Board 
determines that such credit transactions are necessary or appropriate 
to preserve the safety and soundness of the foreign banking 
organization or U.S. financial stability. In considering this 
determination, the Board will consider whether any of the following 
circumstances exist:
    (1) A decrease in the U.S. intermediate holding company's or 
foreign banking organization's capital stock and surplus;
    (2) The merger of the U.S. intermediate holding company or foreign 
banking organization with a bank holding company with total 
consolidated assets of $50 billion or more, a nonbank financial company 
supervised by the Board, a foreign banking organization, or U.S. 
intermediate holding company;
    (3) A merger of two unaffiliated counterparties; or
    (4) Any other circumstance the Board determines is appropriate.
    (d) Other measures. The Board may impose supervisory oversight and 
reporting measures that it determines are appropriate to monitor 
compliance with this subpart.

    By order of the Board of Governors of the Federal Reserve 
System, March 4, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-05386 Filed 3-15-16; 8:45 am]
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