Industrial and Commercial Metals, 96353-96361 [2016-31572]
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Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Rules and Regulations
to 50% of the maximum base civil penalty
($46,666).
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a regulation under paragraph (a) of this
section or a compliance order issued
under paragraph (b) of this section, not
to exceed $258,811 for each violation.
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PART 1050—FOREIGN GIFTS AND
DECORATIONS
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IX. Enforcement Actions
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1. Notice of Violation
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(e) * * *
(1) DOE may assess civil penalties of up to
$93,332 per violation per day on contractors
(and their subcontractors and suppliers) that
are indemnified by the Price-Anderson Act,
42 U.S.C. 2210(d). See 10 CFR 851.5(a).
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PART 1013—PROGRAM FRAUD CIVIL
REMEDIES AND PROCEDURES
24. The authority citation for part
1013 continues to reads as follows:
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25. Section 1013.3 is amended by
revising paragraphs (a)(1)(iv) and
(b)(1)(ii) to read as follows:
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§ 1013.3 Basis for civil penalties and
assessments.
PART 1017—IDENTIFICATION AND
PROTECTION OF UNCLASSIFIED
CONTROLLED NUCLEAR
INFORMATION
26. The authority citation for part
1017 continues to read as follows:
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Authority: 42 U.S.C. 7101 et seq.; 50 U.S.C.
2401 et seq.; 42 U.S.C. 2168; 28 U.S.C. 2461
note.
27. Section 1017.29 is amended by
revising paragraph (c) to read as follows:
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Civil penalty.
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(c) Amount of penalty. The Director
may propose imposition of a civil
penalty for violation of a requirement of
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Enforcement.
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(d) * * * The court in which such
action is brought may assess a civil
penalty against such employee in any
amount not to exceed the retail value of
the gift improperly solicited or received
plus $19,621.
BILLING CODE 6450–01–P
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 7
[Docket ID OCC–2016–0022]
RIN 1557–AD93
Industrial and Commercial Metals
Office of the Comptroller of the
Currency (OCC), Treasury.
ACTION: Final rule.
AGENCY:
The OCC is finalizing a rule
to prohibit national banks and federal
savings associations from dealing or
investing in industrial or commercial
metals.
SUMMARY:
This final rule is effective April
1, 2017.
FOR FURTHER INFORMATION CONTACT:
Casey Scott Laxton, Counsel, or Margo
Dey, Counsel, Securities and Corporate
Practices Division, (202) 649–5510; Carl
Kaminski, Special Counsel, Legislative
and Regulatory Activities Division,
(202) 649–5490; or, for persons who are
deaf or hard of hearing, TTY, (202) 649–
5597, 400 7th Street SW., Washington,
DC 22019.
SUPPLEMENTARY INFORMATION:
DATES:
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29. Section 1050.303 is amended by
revising the last sentence in paragraph
(d) to read as follows:
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[FR Doc. 2016–31035 Filed 12–29–16; 8:45 am]
(a) * * *
(1) * * *
(iv) Is for payment for the provision
of property or services which the person
has not provided as claimed, shall be
subject, in addition to any other remedy
that may be prescribed by law, to a civil
penalty of not more than $10,957 for
each such claim.
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(b) * * *
(1) * * *
(ii) Contains or is accompanied by an
express certification or affirmation of
the truthfulness and accuracy of the
contents of the statement, shall be
subject, in addition to any other remedy
that may be prescribed by law, to a civil
penalty of not more than $10,957 for
each such statement.
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Authority: The Constitution of the United
States, Article I, Section 9; 5 U.S.C. 7342; 22
U.S.C. 2694; 42 U.S.C. 7254 and 7262; 28
U.S.C. 2461 note.
§ 1050.303
Authority: 31 U.S.C. 3801–3812; 28 U.S.C.
2461 note.
§ 1017.29
28. The authority citation for part
1050 continues to read as follows:
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I. Background
In September 2016, the OCC issued a
Notice of Proposed Rulemaking (NPRM)
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to prohibit national banks from dealing
or investing in industrial or commercial
metals.1 The OCC proposed to: (i)
Exclude industrial and commercial
metals from the terms ‘‘exchange,’’
‘‘coin,’’ and ‘‘bullion’’ in the ‘‘powers
clause’’ of the National Bank Act at 12
U.S.C. 24(Seventh); and (ii) provide that
dealing or investing in industrial or
commercial metal is not part of, or
incidental to, the business of banking.
The proposed prohibitions were
generally consistent with
recommendations made by the U.S.
Senate Permanent Subcommittee on
Investigations in 2014,2 as well as
recommendations described in a
September 2016 report to the U.S.
Congress and the Financial Stability
Oversight Council (FSOC) prepared by
the OCC, the Board of Governors of the
Federal Reserve System (‘‘Board’’), and
the Federal Deposit Insurance
Corporation pursuant to section 620 of
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (‘‘Dodd-Frank
Act’’).3
A national bank may engage in
activities that are part of, or incidental
to, the business of banking under 12
U.S.C. 24(Seventh). Section 24(Seventh)
lists several activities that are part of the
business of banking; for example, it
expressly provides that national banks
may buy and sell exchange, coin, and
bullion. In addition to these enumerated
powers, section 24(Seventh) authorizes
national banks to exercise all such
incidental powers as shall be necessary
to carry on the business of banking.
National banks also are authorized to
engage in any other activities not
expressly enumerated in the statute that
the Comptroller of the Currency
1 81
FR 63428 (Sept. 15, 2016).
Street Bank Involvement with Physical
Commodities,’’ U.S. Senate Permanent
Subcommittee on Investigations, available at:
https://www.hsgac.senate.gov/download/report-wallstreet-involvement-with-physical-commodities
(‘‘PSI Report’’).
3 ‘‘Report to Congress and the Financial Stability
Oversight Council Pursuant to Section 620 of the
Dodd-Frank Act,’’ at 86–90 (September 2016),
available at: https://www.occ.gov/news-issuances/
news-releases/2016/nr-ia-2016–107a.pdf (‘‘620
Study’’). Section 620 of the Dodd-Frank Act
required the federal banking agencies to conduct a
study and prepare a report, including
recommendations, on the types of activities and
investments permissible for banking entities, the
associated risks, and how banking entities mitigate
those risks. In a parallel action, the Board also
issued a proposed rule in September 2016. The
proposed Board rule addressed the physical
commodities activities and investments of banking
holding companies and financial holding
companies, including copper. Risk-Based Capital
and Other Regulatory Requirements for Activities of
Financial Holding Companies Related to Physical
Commodities and Risk-Based Capital Requirements
for Merchant Banking Investments, 81 FR 67220
(Sept. 30, 2016).
2 ‘‘Wall
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reasonably determines are part of the
business of banking.4
In Interpretive Letter 693,5 issued
approximately twenty-one years ago, the
OCC authorized national banks to buy
and sell copper on the grounds that
trading copper was becoming
increasingly similar to trading gold,
silver, platinum, and palladium. The
letter observed that copper was traded
in liquid markets; that it was traded in
a form standardized as to weight and
purity; and that the bank seeking
authority to engage in the activity traded
copper under policies and procedures
similar to those that governed the bank’s
trading of precious metals. The letter
concluded that national banks could
buy and sell copper under the express
authority to buy and sell coin and
bullion and as part of or incidental to
the business of banking. The scope of
the authorization in Interpretive Letter
693 was sufficiently broad to permit
national banks to buy and sell copper in
the form of cathodes, which are used for
industrial purposes.
In the NPRM, the OCC proposed to
reconsider the interpretation set forth in
Interpretive Letter 693.
Now, the OCC is finalizing the NPRM
and revising its regulations to prohibit
national banks from dealing and
investing in a metal (or alloy), including
copper, in a form primarily suited to
industrial or commercial use (industrial
or commercial metal).6 The OCC has
added a divestiture period to the final
rule, provided clarifying language to the
dealing and investing prohibition for
national banks, and clarified federal
savings associations’ (FSA) authority to
engage in activity that is not dealing or
investing, but is otherwise finalizing the
NPRM as proposed. The final rule: (i)
Excludes industrial and commercial
metals from the terms ‘‘exchange,’’
‘‘coin,’’ and ‘‘bullion’’ in 12 U.S.C.
24(Seventh); and (ii) provides that
dealing or investing in industrial or
commercial metal is not part of, or
incidental to, the business of banking.
Examples of metals and alloys in a form
primarily suited for industrial or
commercial use include copper
cathodes, aluminum T-bars, and gold
jewelry. For the reasons stated in this
preamble, the OCC has concluded that
dealing or investing in these metals is
not appropriate for national banks. The
4 NationsBank of N.C., N.A. v. Var. Ann. Life. Ins.
Co. (VALIC), 513 U.S. 251, 258–59 (1995).
5 1995 WL 788816 (Nov. 14, 1995).
6 The OCC considers the definition of industrial
or commercial metal to include a warehouse receipt
for such metal.
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final rule supersedes Interpretive Letter
693.7
The final rule also applies to FSAs.
The Home Owners’ Loan Act does not
expressly authorize FSAs to buy or sell
exchange, coin, and bullion.8 While
FSAs have incidental authority to buy
and sell precious metals in certain cases
and to sell gold and silver coins minted
by the U.S. Treasury, the OCC has not
identified any precedent authorizing
FSAs to buy and sell any industrial or
commercial metal.9 The OCC does not
interpret FSAs’ powers to buy and sell
metals to be broader than those of
national banks.10 To avoid doubt, and to
further integrate national bank and FSA
regulations, the final rule prohibits
FSAs from dealing or investing in
industrial or commercial metal.11
II. Summary of the Comments on the
Notice of Proposed Rulemaking
The OCC received four comments on
the NPRM. Two comments were from
financial industry trade associations and
two were from individuals. While the
comments generally were supportive of
the NPRM, the trade association
commenters requested that the OCC
confirm the permissibility of certain
lending and leasing transactions
involving physical metals and expressed
concern about the potential impact of
7 See Nat’l Cable & Telecomms. Ass’n v. Brand X
Internet Servs., 545 U.S. 967, 981–82 (2005) (agency
reconsiderations of prior interpretations entitled to
judicial deference so long as the agency adequately
explains the reasons for the change); Motor Vehicle
Manufacturers Association of the U.S., Inc. v. State
Farm Mutual Automobile Insurance Company, 463
U.S. 29, 43 (1983) (‘‘agency must examine the
relevant data and articulate a satisfactory
explanation for its action including a ‘rational
connection between the facts found and the choice
made’ ’’).
8 See 12 U.S.C. 1464(c).
9 See, e.g., OTS Op. Ch. Couns. P–2006–1 (Mar.
6, 2006), 2006 WL 6195026 (engaging in precious
metal transactions on behalf of customers); Gold
Bullion Coin Transactions, 51 FR 34950 (Oct. 1,
1986); Letter from Jack D. Smith, Deputy General
Counsel, Federal Home Loan Bank Board, 1988 WL
1021651 (May 18, 1988). All precedents (orders,
resolutions, determinations, agreements,
regulations, interpretive rules, interpretations,
guidelines, procedures, and other advisory
materials) made, prescribed, or allowed to become
effective by the former Office of Thrift Supervision
or its Director that apply to FSAs remain effective
until the OCC modifies, terminates, sets aside, or
supersedes those precedents. 12 U.S.C. 5414(b).
10 See OTS Op. Ch. Couns. P–2006–1 (Mar. 6,
2006), 2006 WL 6195026 (permissibility of FSA
metal activity is evaluated under a four-part test
referencing the activities of national banks).
11 The final rule indirectly applies to federal
branches and agencies of foreign banks because
they operate with the same rights and privileges
(and subject to the same duties, restrictions,
penalties, liabilities, conditions, and limitations) as
national banks. 12 CFR 28.13(a)(1). The final rule
also indirectly applies to insured state banks and
state savings associations. See 12 U.S.C. 1831a,
1831e.
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the rulemaking on the liquidity of the
copper market. A detailed discussion of
the commenters’ concerns and the
OCC’s response follows.
A. Prohibition on Dealing and Investing
for Industrial and Commercial Metal
(Including Copper)
Two commenters offered general
views on the proposed dealing and
investing prohibition for industrial and
commercial metal, including copper,
under the proposed rule. One was
generally supportive of the NPRM’s
treatment of copper cathodes as an
industrial and commercial metal. This
commenter noted the proposal was
consistent with banks’ treatment of
copper, as banks currently buy and sell
copper based on its value for industrial
and commercial purposes rather than as
a store of value. The commenter also
offered additional support for the
rulemaking, noting that banks that own
copper are exposed to large fluctuations
in copper prices, encounter potential
conflicts of interest between house
positions and client positions, and may
be able to manipulate copper markets
through large physical positions. This
commenter asserted that the proposed
treatment is appropriate because bank
copper trading activities more closely
resemble commercial enterprises rather
than a banking business. The
commenter pointed to the PSI Report
and 620 Study to support these
comments.
The second commenter expressed
concern that the OCC has not
demonstrated a compelling reason to
change its 1995 copper interpretation.
The commenter argued that the reasons
the OCC approved copper activities in
Interpretive Letter 693 are still valid
today and that the OCC should not
pursue the rulemaking in the absence of
a compelling need or corresponding
regulatory benefit. After carefully
considering these comments, the OCC
continues to believe that dealing or
investing in copper cathodes, and other
industrial or commercial metal, is not
appropriate for national banks. As the
OCC explained in the NPRM, events
subsequent to Interpretive Letter 693
have confirmed copper is a base metal
and thus, should be distinguished from
precious metals that are not held in
industrial or commercial form.12 For
example, in 2000, the London Metals
Exchange (‘‘LME’’) introduced a futures
contract on a base metal index
containing copper, aluminum, and
12 81
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zinc.13 In 2006, the LME followed with
‘‘mini’’ futures for copper, aluminum
and zinc. By contrast, firms have
launched exchange-traded funds (ETFs)
that invest solely in gold, silver,
palladium, platinum, or some
combination thereof, indicating a
widespread belief that these metals are
a store of value. The OCC notes there are
no copper ETFs. In addition, the OCC
understands that national banks that
trade copper treat it as a base metal and
trade it alongside aluminum and zinc
rather than gold and silver. Finally, the
OCC considered the issues and risks
identified in the PSI Report with respect
to physical copper.14 The commenter’s
observations do not negate the
information provided in the NPRM and
these facts demonstrate that the OCC
has adequately described its reasons for
changing its 1995 interpretation.
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B. Physical Holdings
The preamble to the NPRM explained
that the OCC did not consider the
proposed rule to prohibit national banks
from buying or selling metal through a
transitory title transfer entered into as
part of a customer-driven financial
intermediation business.15 The OCC
explained that metal owned through a
transitory title transfer typically does
not entail physical possession of a
commodity; the ownership occurs solely
to facilitate the underlying transaction
and lasts only for a moment in time.
However, the OCC invited comment on
whether transitory title transfers
involving metals present risks that
warrant treating such transactions as
physical holdings.
Three commenters addressed
transitory title transfers. Two
commenters generally supported the
OCC’s proposed treatment of transitory
title transfers. One of these commenters
agreed with the assertion in the NPRM
that there is no physical possession of
the metal in transitory title transfers.
This commenter noted that the risks of
legal liability typically associated with
physical commodity positions are not
present in transitory title transfers and
that these transactions more closely
resemble customer-driven, cash-settled
commodity derivatives than physical
positions. Another commenter also
supported the treatment of transitory
title transfers, but suggested the final
rule text should limit transitory title
transfers to customer-driven financial
intermediation transactions that are part
13 The LME describes itself as ‘‘the world centre
for industrial metals trading.’’ See https://
www.lme.com/.
14 See, e.g., PSI Report at 362–396.
15 81 FR 63431.
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of the business of banking. A third
commenter disagreed that transitory
title transfers are different from dealing
and investing in physical metal just
because the bank holds the metal for a
legal instant. As discussed in detail
below, the OCC continues to believe
that transitory title transfers do not
entail physical possession of industrial
and commercial metals. The OCC also
notes that relevant precedent already
provides that transitory title transfers
must be part of a customer-driven
financial intermediation business.16
Therefore, the OCC is finalizing the rule
as proposed.
In addition to addressing transitory
title transfers, one of the commenters
also requested that the OCC confirm that
interests in unallocated metal accounts
are not physical holdings under the
final rule. The commenter identified
various activities in which national
banks are engaged that could involve an
interest in an unallocated metals
account. The OCC notes that these
activities are fact specific, and
determinations about fact-specific
activities need to be evaluated on a caseby-case basis. Therefore, the OCC
believes it is appropriate to address the
applicability of the final rule to these
activities on a case-by-case basis.
National banks with questions regarding
the permissibility of transactions that
involve unallocated metals accounts
should discuss the issue with the OCC.
The OCC is willing to entertain requests
for such determinations, consistent with
its historical practice of providing
interpretive opinions in cases where
there is doubt about the permissibility
of particular activities.
C. Reverse Repurchase Agreements
The NPRM explained that the OCC
views national banks’ lending authority
to include reverse repurchase
agreements that are the functional and
economic equivalent of secured loans.17
Banks may use commodity reverse
repurchase agreements to finance
customer inventory.18 Using a standard
reverse repurchase agreement for metal
to provide financing for a bank customer
rather than a traditional bank loan
ordinarily does not indicate dealing or
investing in the metal. However, the
NPRM noted that the facts and
circumstances of a particular transaction
may warrant a different conclusion. For
example, if a bank incurs commodity
price risk or pledges, sells, or
rehypothecates metal acquired under
16 Interpretive Letter 1073, 26 OCC Q.J. 46, 2007
WL 5122911 (Oct. 19, 2006).
17 81 FR 63431.
18 12 CFR 211.4(a)(7).
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reverse repurchase agreements, the
NPRM provided that the OCC may view
the transaction to be dealing or
investing in the metal. The OCC invited
comment on the treatment of reverse
repurchase agreements under the
proposed rule.
Two commenters addressed the
treatment of reverse repurchase
agreements. One suggested the OCC
prohibit all reverse repurchase
agreements where there is commodity
market or liquidity risk. This
commenter wrote that a prohibition is a
better approach than a facts and
circumstances review in light of limited
OCC resources. The other commenter
asserted that OCC should confirm that
these types of reverse repurchase
agreements are permissible activities not
affected by the rule. This commenter
noted that the reuse of the collateral is
a long-standing practice in asset-based
financing and therefore pledging,
selling, or rehypothecating metal owned
under a reverse repurchase agreement
should not be viewed as indicia of
dealing activity.
The OCC continues to have concerns
that reverse repurchase agreements that
involve commodity price risk or that
involve pledging, selling, or
rehypothecating metal could be
structured in some circumstances in a
manner that constitutes dealing or
investing activity. The OCC recognizes,
as a commenter suggested, that banks
may enter into hedges to mitigate price
risk that exists at the conclusion of
certain reverse repurchase agreements
and may pledge collateral for the
purpose of funding its customer
financing activities. Structuring a
transaction in these ways could, in some
circumstances, reduce indicia of
investing or dealing activity. However,
the OCC does not believe it is
appropriate to conclude that all reverse
repurchase agreements that involve
commodity price risk or pledging, etc. of
collateral are permissible. Therefore, the
OCC continues to believe that it is
appropriate to evaluate reverse
repurchase agreements that involve
commodity price risk or pledging, etc. of
collateral on a facts and circumstances
basis, as appropriate. This approach will
allow the OCC an opportunity to
evaluate transactions in context and to
consider relevant facts before reaching a
determination as to whether a
transaction involves dealing or
investing. The OCC is therefore
declining to make the changes the
commenters have requested.
D. Other Permissible Transactions
The proposed rule identified two
incidental authorities under which
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acquiring and selling metal would
remain permissible for national banks:
first, collateral foreclosure activities
designed to mitigate loan losses; 19
second, nominal physical hedges of
customer-driven commodity derivatives.
The OCC also explained in the preamble
to the NPRM that a bank may buy and
sell metal in conjunction with certain
leasing authorities.20
One commenter addressed the
proposed treatment of nominal hedging
activities. This commenter suggested
that the OCC require banks to disclose
hedging amounts to the OCC. This
commenter also suggested that the OCC
require the hedge be designed to reduce
risk in order to prevent commodity
speculation. The OCC notes that it
monitors bank hedging activity through
its regular course of bank supervision.
Additionally, banks that engage in
commodity hedging activities already
must do so in accordance with
applicable law, including requirements
that the hedge be designed to reduce
risk.21 For these reasons, the OCC does
not believe that the changes this
commenter suggested are necessary.
Another commenter asked that the
OCC modify the final rule to expressly
permit certain metals-based financing
activities. The commenter described
several metal leasing and metal
consignment transactions. As explained
in the NPRM and below, banks may not
buy and sell industrial or commercial
metal for the purposes of dealing or
investing in that metal. However, banks
may continue to buy and sell industrial
or commercial metal under other
incidental authorities that do not
involve dealing or investing. To the
extent a bank proposes to engage in a
metals-based transaction that presents
an interpretive issue(s) under the
authorities provided for in 12 U.S.C.
24(Seventh), the OCC will address
permissibility on a facts and
circumstances basis. The OCC may issue
interpretive analysis, as appropriate.
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E. Existing Holdings
The OCC solicited comment in the
NPRM on the treatment of existing
holdings of industrial and commercial
metals. Specifically, the OCC asked
whether five years to divest nonconforming assets, with the possibility
of a five-year extension, would be an
appropriate period of time. The OCC
19 81
FR 63433.
FR 63431.
21 See, e.g., Interpretive Letter 684 (Aug. 4, 1995)
1995 WL 550219; OCC Bulletin 2015–3 (Aug. 4,
2015); 12 CFR 44.3(b) and 44.5(a) (Volcker Rule
requirement that hedges be designed to reduce or
otherwise significantly mitigate one or more
specific identifiable risks).
20 81
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also asked whether there were
compelling reasons to grandfather
existing industrial and commercial
metal holdings indefinitely.22
Two commenters addressed the issue
of existing holdings of industrial and
commercial metal. One commenter
argued industrial and commercial metal
held before the conformance date
should be grandfathered because doing
so would limit negative effects on
copper markets and bank customers.
This commenter also asked that the text
of the rule include a minimum of five
years to conform to the prohibition,
arguing this would minimize the impact
of the rule. Another commenter did not
support allowing the banks additional
time to divest their physical metals
holdings.
National banks do not currently
engage in significant dealing or
investing activities in relation to
physical industrial and commercial
metal. Nor do national banks currently
hold significant stores of industrial and
commercial metal. Therefore, the OCC
finds no compelling reason to
grandfather existing activities. However,
the OCC does believe that a short
divestiture period would be appropriate.
Given national banks’ limited industrial
and commercial metal activities, the
OCC concludes that a full five-year
divestiture period is not necessary. The
OCC is therefore including a provision
in the final rule that requires national
banks to divest existing holdings of
industrial and commercial metal
acquired through dealing or investing
activities as soon as practicable, but not
later than one year from the effective
date of the rule.23 This provision
enables the OCC to grant up to four
separate one-year extensions of this
divestiture period if the bank has made
a good faith effort to dispose of the
metal and the bank’s retention of the
metal is not inconsistent with its safe
and sound operation. The OCC notes
that the approach of granting a
divestiture period with the possibility of
an extension is consistent with the
OCC’s treatment of other types of
nonconforming assets.24 This
divestiture provision applies only to
existing holdings; national banks may
not acquire additional holdings of
industrial and commercial metal
22 81
FR 63432.
final rule provides a divestiture period for
both national banks and FSAs. The OCC does not
expect that a divestiture period will be necessary
for FSAs and most national banks. However, in
order to ensure an orderly asset liquidation process
for all institutions that hold metal subject to this
prohibition, the divestiture provision is available to
both national banks and FSAs.
24 See, e.g., 12 U.S.C. 29 (holding period for other
real estate owned).
23 The
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through dealing or investing activities
during, or after, the divestiture period.
F. Impact of the Rule
Three commenters discussed the
impact of the proposed rule. Two
commenters noted, very generally, that
they expect the rule to increase cost for
customers if finalized as proposed. One
of these commenters also suggested the
proposal would have a negative impact
on the copper market as a whole,
asserting that the costs of the rule will
not be minimal. This commenter also
argued there would be no regulatory
benefit to this prohibition. Another
commenter said the NPRM would
reduce financial risk and conflicts of
interests for banks while also allowing
the OCC to impose limits on copper and
other industrial and commercial metals.
As noted above, national banks do not
currently engage in significant dealing
or investing activities in relation to
physical industrial and commercial
metal. Because these markets tend to be
highly competitive, we expect that the
removal of OCC-supervised institutions
as just one class of potential investors/
dealers will not have a material effect on
these markets. Furthermore, as
explained in more detail below, national
banks may continue to buy and sell
industrial and commercial metal under
certain incidental authorities. The OCC
expects these limited permissible
activities will allow banks to continue
to serve customers with interests in
commercial and industrial metals in
capacities that do not involve dealing or
investing activities.
III. Description of the Final Rule
A. Industrial or Commercial Metal Is
Not ‘‘exchange, coin, and bullion’’
As noted above, the National Bank
Act authorizes national banks to buy
and sell exchange, coin, and bullion. In
this final rule, the OCC is interpreting
these terms to exclude metals in a form
primarily suited to industrial or
commercial use.
Banking Circular 58 (BC–58) 25 sets
forth general guidelines that apply to
national banks’ coin and bullion
activities. It defines ‘‘coin’’ as ‘‘coins
held for their metallic value which are
minted by a government, or exact
restrikes of such coins minted at a later
date by or under the authority of the
issuing government.’’ Contemporaneous
OCC interpretive letters elaborated that
‘‘coin’’ referred only to media of
exchange.26 BC–58 defines ‘‘bullion’’ as
25 BC–58 (Rev.) (Nov. 3, 1981). The OCC
published the original version in 1974.
26 Interpretive Letter 326 (Jan. 17, 1985), 1985 WL
202590; Interpretive Letter 252 (Oct. 26, 1982), 1982
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‘‘uncoined gold or silver in bar or ingot
form.’’ These definitions do not
encompass industrial or commercial
metal.
Interpretive letters published after
BC–58 interpreted national banks’
authority to buy coin and bullion to
include other precious metals, namely
platinum and palladium. Consistent
with BC–58’s definition of ‘‘coin,’’ the
OCC in 1987 found that legal tender
platinum coins held for their metallic
value were ‘‘coin.’’ 27 That same letter
prohibited dealing in platinum bars.
However, in 1991, the OCC concluded
that market developments warranted
treating platinum bars as bullion.28 The
OCC also found trading in platinum bars
to be incidental to trading in platinum
coins.29 For similar reasons, the OCC
concluded palladium was coin and
bullion and national banks could trade
and deal in palladium as part of the
business of banking.30 In support of its
position, the OCC noted that the London
Platinum and Palladium Market had
linked platinum and palladium for
market making and regulatory purposes
and that most of the Market’s members
were banks.
However, other interpretive letters
recognized that not every precious metal
is coin or bullion. Jewelry, the OCC
determined, is not.31
The OCC has long concluded that
‘‘exchange, coin, and bullion’’ does not
encompass industrial or commercial
metal. The OCC believes this conclusion
is consistent with the National Bank Act
and current market practice. For
example, in the mid-19th century, when
Congress passed the National Bank Act,
‘‘bullion’’ meant metal suitable for
coining, not metal suitable for making
wires.32 The contemporary
WL 54157; Letter from Peter Liebesman, Assistant
Director, Legal Advisory Services Division (Feb. 18,
1982), 1982 WL 170844. But see Letter from Richard
V. Fitzgerald, Deputy Chief Counsel (Nov. 4, 1983),
1983 WL 145720 (concluding that national banks
could purchase and sell the Department of
Treasury’s commemorative Olympic coins based on
their metallic value even though it was unlikely
that the coins would be used as a medium of
exchange).
27 Letter from William J. Stolte, Chief National
Bank Examiner (July 29, 1987), 1987 WL 149775.
28 Interpretive Letter 553 (May 2, 1991), 1991 WL
340660 (noting that (i) the financial press
considered platinum coins and bars to be bullion,
and (ii) a state statute defined ‘‘bullion’’ to include
platinum).
29 Id.
30 Interpretive Letter 685 (Aug. 4, 1995), 1995 WL
550220.
31 See No-Objection Letter 88–8 (May 26, 1988),
1988 WL 284872 (selling gold and silver jewelry is
impermissible general merchandising); Letter from
Madonna K. Starr, Attorney (Oct. 3, 1986), 1986 WL
144029 (limited design jewelry is not exchange,
coin, or bullion).
32 See Act of June 22, 1874, 18 Stat. 202
(authorizing the transfer from the U.S. bullion fund
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understanding of ‘‘bullion’’ is broader—
most currency is no longer made of
precious metal—but the contemporary
understanding does distinguish bullion
from industrial or commercial metal.
For example, modern bullion markets
trade precious metals by the kilogram.33
By contrast, industrial and commercial
metals markets trade base metals in
quantities suitable for industrial or
commercial use.34 In general, gold,
silver, platinum, and palladium are
bullion today because they:
• Trade in troy ounces or grams
rather than metric tons; 35
• Trade in pure forms; 36
• Trade in a form suitable for coining;
• Trade as precious metals in the
world’s major organized markets,
including the London bullion markets;
and
• Are considered currency by the
International Organization for
Standardization.37
Gold, silver, platinum, and palladium
in industrial or commercial form are not
exchange, coin, or bullion.
B. Dealing or Investing in Industrial or
Commercial Metal Is Neither Part of, nor
Incidental to, the Business of Banking
Interpretive Letter 693 concluded that
national banks could buy and sell
copper (including industrial copper) as
of refined gold bars bearing the United States stamp
of fineness, weight, and value, or bars from any
melt of foreign coin or bullion of standard equal to
or above that of the United States); Act of Feb. 12,
1873 § 31, 17 Stat. 429 (‘‘The bullion thus placed
in the hands of the melter and refiner shall be
subjected to the several processes which may be
necessary to form it into ingots of the legal
standard, and of a quality suitable for coinage.’’).
33 See, e.g., London Bullion Market Association,
The Good Delivery Rules for Gold and Silver Bars
11 (Mar. 2015), available at https://
www.lbma.org.uk/assets/market/gdl/GD_Rules_15_
Final%2020160512.pdf; London Platinum &
Palladium Market, ‘‘The London/Zurich Good
Delivery List,’’ https://www.lppm.com/gooddelivery/ (visited July 19, 2016).
34 The LME describes itself as the ‘‘world centre
for the trading of industrial metals—more than
three quarters of all non-ferrous metal futures
business is transacted on [its] platforms.’’ LME,
‘‘About us,’’ https://www.lme.com/about-us (visited
July 19, 2016). The LME trades aluminum,
aluminum alloys, copper, lead, nickel, tin, and zinc.
LME, ‘‘Metals,’’ https://www.lme.com/metals (visited
July 19, 2016).
35 See, e.g., Bloomberg, ‘‘Gold, Silver, and
Industrial Metals Prices,’’ https://
www.bloomberg.com/markets/commodities/futures/
metals.
36 See, e.g., London Bullion Market Association,
The Good Delivery Rules for Gold and Silver Bars
6 (Mar. 2015) (minimum fineness for gold is 99.5
percent and for silver is 99.9 percent); London
Platinum & Palladium Market, ‘‘The London/Zurich
Good Delivery List,’’ https://www.lppm.com/gooddelivery/ (minimum fineness for platinum and
palladium is 99.95 percent).
37 ISO 4217 (Aug. 1, 2015), available at https://
www.currency-iso.org/dam/downloads/lists/list_
one.xls.
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a part of or incidental to the business of
banking. The OCC has reviewed the
bases for the conclusion in Interpretive
Letter 693 that buying and selling
industrial copper is part of the business
of banking, including developments in
copper markets that followed this letter.
For the following reasons, the OCC has
determined that buying and selling
copper—or any other metal—in
industrial or commercial form for the
purpose of dealing or investing in that
metal is not part of the business of
banking.
When the OCC issued Interpretive
Letter 693 in 1995, the agency noted
increasing similarity between
transactions involving copper and those
transactions already conducted by
national banks with respect to gold,
silver, platinum and palladium
(precious metals). This increasing
similarity informed the OCC’s view at
that time that buying and selling copper,
including dealing and investing, was
part of, or incidental to, the business of
banking. However, copper markets have
not increased in similarity to precious
metal markets.38 Instead, as noted in
detail above, copper is generally traded
as a base metal.39
The OCC believes that dealing or
investing in industrial or commercial
metals, including base and precious
metals in this form, is not the functional
equivalent of dealing or investing in
coin and bullion. The paradigmatic
example of functional equivalence is
that a lease is in economic substance a
secured loan.40 But the significant
differences between dealing in
industrial or commercial metals and
dealing in coin and bullion demonstrate
that the former is not, in economic
substance, the same as the latter. Most
importantly, industrial and commercial
metals trade in base metal markets by
the ton in cathode or other industrial
form, while coin and bullion trade in
precious metal markets by the troy
ounce or kilogram in bar or ingot form.
38 Events subsequent to Interpretive Letter 693
have confirmed copper’s status as a base metal. In
2000, the LME introduced a future on a base metal
index containing copper, aluminum, lead, nickel,
tin, and zinc. Then, in 2006, it introduced ‘‘mini’’
futures for copper, aluminum, and zinc. Similarly,
many firms have launched ETFs that invest solely
in gold, silver, palladium, platinum, or some
combination thereof, indicating a widespread belief
that these metals are a store of value. However,
there is no copper ETF. Finally, the OCC
understands that national banks that trade copper
treat it as a base metal and trade it alongside
aluminum and zinc rather than gold and silver.
39 See generally PSI Report at 364 (2014)
(identifying banks, trading firms, analysts, and
exchanges that treat copper as a base metal for
trading and risk management purposes).
40 See M&M Leasing Corp. v. Seattle First Nat’l
Bank, 563 F.2d 1377 (9th Cir. 1977).
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In addition, banks’ risk management
systems distinguish between precious
metals and base metals.
The OCC has also considered other
factors identified in relevant precedent
for determining whether dealing in or
investing in industrial or commercial
metal is part of the business of
banking.41 The OCC does not believe
that analysis under these factors
supports a conclusion that this activity
is part of the business of banking. For
example, the OCC has not seen evidence
that this activity strengthens a bank by
benefiting its customers or its
business.42 Nor is the OCC aware of any
state-chartered banks dealing in or
investing in industrial or commercial
metal.43 Indeed, the OCC has not
identified any precedent authorizing
that activity for state banks. Such
activity would suggest dealing or
investing in commercial metals may be
part of the business of banking.
As described above, under 12 U.S.C.
24(Seventh), a national bank has the
power to exercise all such incidental
powers as shall be necessary to carry on
the business of banking. An activity is
incidental to the business of banking if
it is convenient or useful to an activity
that is part of the business of banking.44
The OCC believes that dealing or
investing in industrial or commercial
metal is not incidental to the business
of banking. Some customers may wish
to trade industrial or commercial metal
with national banks. However, because
few banks buy or sell industrial or
commercial metal in the ordinary course
of business, it does not appear that
dealing or investing in industrial or
commercial metal significantly
enhances national banks’ ability to offer
banking products and services,
including those related to precious
metals. Moreover, dealing or investing
41 See, e.g., Merchants’ Nat’l Bank v. State Nat’l
Bank, 77 U.S. 604, 648 (1871) (holding that national
banks could certify checks because the activity had
‘‘grown out of the business needs of the country.’’).
42 Currently, national banks’ dealing and
investments in industrial or commercial metal are
limited, suggesting that the business needs of the
U.S. economy are not meaningfully affected by
national banks’ dealing in industrial or commercial
metal. Nor is there evidence that the amount of
revenue from industrial or commercial metal
dealing and investing meaningfully improve
national banks’ financial strength. In any case, the
prospect for additional revenue alone is not
sufficient to deem an activity to be part of the
business of banking. See VALIC, 513 U.S. at 258
n.2. See also No-objection Letter 88–8 (May 26,
1988), 1988 WL 284872 (concluding that it is
impermissible for a national bank to make
substantial profits from the sale of merchandise).
43 See Colorado Nat’l Bank v. Bedford, 310 U.S.
41, 49–50 (1940).
44 Interpretive Letter 1071 (Sept. 6, 2006), 26 OCC
Q.J. 46, 2007 WL 5122909 (citing Arnold Tours, Inc.
v. Camp, 472 F.2d 427, 431–32 (1st Cir. 1972)).
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in industrial or commercial metal does
not appear to enable national banks to
use capacity acquired for banking
operations or otherwise avoid economic
loss or waste. Therefore, the OCC
concludes national banks may not deal
or invest in industrial or commercial
metal under their incidental powers.
C. Transactions in Industrial or
Commercial Metal That May Be
Permissible
National banks do have incidental
authority to buy and sell industrial or
commercial metal in limited cases.
Buying or selling industrial or
commercial metal could be incidental to
lending activities. For example, a
mining company could post a copper
cathode as collateral for a loan. Pursuant
to the national bank’s authority to
acquire property in satisfaction of debt
previously contracted, the bank could
seize and then sell the copper to
mitigate loan losses if the borrower
defaulted.45 National banks also have
incidental authority to buy and sell
nominal amounts of industrial or
commercial metal to hedge customerdriven commodity derivatives.46 The
final rule does not prohibit these
purchases and sales because they are
not dealing or investing.47
45 Cf. Cooper v. Hill, 94 F. 582 (8th Cir. 1899)
(foreclosure of a mine); First Nat’l Bank of Parker
v. Peavy Elevator Co., 10 S.D. 167, 170 (1897)
(foreclosure of grain seed and subsequent sale).
46 Interpretive Letter 684 (Aug. 4, 1995)
(permitting physical delivery of commodities as
hedges for customer-driven, non-speculative
transactions), 1995 WL 550219; OCC Bulletin 2015–
35, Quantitative Limits on Physical Commodity
Transactions (Aug. 4, 2015) (explaining that
‘‘nominal’’ means 5 percent of the bank’s short
positions in a particular commodity). The final rule
explicitly provides that national banks may
continue to buy and sell physical metal to hedge a
derivative. A similar provision is not necessary for
FSAs because they do not engage in this activity.
See 620 Study at 88; OCC Bulletin 2015–35, n. 1.
47 Cf. First Nat’l Bank v. Nat’l Exch. Bank, 92 U.S.
122, 128 (1875) (‘‘In the honest exercise of the
power to compromise a doubtful debt owing to a
bank, it can hardly be doubted that stocks may be
accepted in payment and satisfaction, with a view
to their subsequent sale or conversion into money
so as to make good or reduce an anticipated loss.
Such a transaction would not amount to a dealing
in stocks. It was, in effect, so decided in Fleckner
v. Bank U.S., 8 Wheat. 351 [22 U.S. 338 (1823)],
where it was held that a prohibition against trading
and dealing was nothing more than a prohibition
against engaging in the ordinary business of buying
and selling for profit, and did not include purchases
resulting from ordinary banking transactions.’’).
Similarly, national banks may buy and sell
industrial or commercial metal as part of their
leasing business. 12 U.S.C. 24(Seventh); 12 U.S.C.
24(Tenth); 12 CFR 23.4. A car, for example,
contains metal in a commercial form, but buying a
car to lease it is not dealing or investing in
commercial metal. Rather, a lease, like a reverse
repurchase transaction, is a secured loan in a
different form. National banks may also buy and
sell industrial or commercial metals to install pipes
and electrical wiring in their physical premises. 12
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In certain situations, national banks
may buy and sell industrial and
commercial metal as reverse repurchase
agreements that are the functional and
economic equivalent of secured loans.48
In a reverse repurchase agreement, a
bank extends credit by simultaneously
buying collateral from a client and
agreeing to sell the collateral back to the
client at a future date. The difference
between the sale and purchase price is
effectively the interest the client pays
for the extension of credit. If the reverse
repurchase agreement counterparty
defaults, the bank can mitigate its losses
by selling the collateral without first
foreclosing on it. Financing customer
inventory is a traditional bank activity;
using reverse repurchase agreements
rather than loans to provide the
financing is merely a different way of
providing financing.49 Financing
customer inventory using reverse
repurchase agreements in itself does not
indicate dealing or investing in the
metal. However, pledging, selling, or
rehypothecating metal acquired under
reverse repurchase agreements could
suggest dealing or investing activity. So,
too, could assuming commodity price
risk. For example, an agreement in
which the counterparty sells a metal at
a certain price to the bank and then
repurchases the metal at a price that
depends on the metal’s then-current
market price could indicate dealing or
investing activity: The bank is assuming
the metal’s price risk and, in some
circumstances, could act to benefit from
spot market price appreciation of the
metal. On the other hand, setting the
repurchase price at the sale price plus
a spread based on the time value of
money is equivalent to a secured loan.
The determination of whether a reverse
repurchase agreement that varies from
this secured loan structure is dealing or
investing is highly dependent upon the
facts of each transaction. National banks
with questions regarding the
permissibility of reverse repurchase
agreements that involve characteristics
identified in this discussion should
discuss the issue with the OCC. The
U.S.C. 29(First); 12 CFR 7.1000. This activity is
clearly not dealing or investing in industrial or
commercial metal.
48 See 12 CFR 211.4(a)(7)
49 Under the National Bank Act, credit exposures
from repurchase and reverse repurchase agreements
are loans and extensions of credit subject to a
national bank’s lending limits. 12 U.S.C. 84(b)(1)(C).
We note that Section 610 of the Dodd-Frank Act
expanded the definition of ‘‘loans and extensions of
credit’’ for purposes of lending limits to include
credit exposure arising from repurchase agreements
and reverse repurchase agreements, among other
transactions. The OCC amended its lending limits
regulation, 12 CFR 32, to implement the statutory
change made by the Dodd-Frank Act.
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OCC is willing to entertain requests for
such determinations, consistent with its
historical practice of providing
interpretive opinions in cases where
there is doubt about the permissibility
of particular activities.
The final rule does not prohibit
national banks from buying and selling
metal through transitory title transfers
entered into as part of a customer-driven
financial intermediation business.50
Interpretive Letter 1073 51 provides that
national banks may hedge metal
derivative transactions on a portfolio
basis with over-the-counter derivative
transactions that settle in cash or
transitory title transfer. Interpretive
Letter 1073 also provides that a national
bank may engage in transitory title
transfers in metals for the
accommodation of customers. The OCC
concluded in Interpretive Letter 1073
that transitory title transfers involving
metals do not entail the physical
possession of commodities.52 The OCC’s
analysis in this letter noted that
transitory title transfers do not involve
the customary activities relating to, or
risks attendant to, commodity
ownership, such as storage costs,
insurance, and environmental
protection. For these reasons, OCC
believes that transitory title transfers do
not constitute physical possession of
commodities and therefore does not
consider transitory title transfers to be
dealing or investing in industrial or
commercial metal for purposes of the
final rule.53 The OCC recognizes that
50 For purposes of the final rule, the OCC
considers a transitory title transfer to be back-toback contracts providing for the receipt and
immediate transfer of title to the metal. This means
that a bank holds title to the metal for no more than
a legal instant. See Interpretive Letter 962 (Apr. 21,
2003), 2003 WL 21283155 (‘‘[T]ransitory title
transfers preclude actual delivery by passing title
down the chain from the initial seller to the
ultimate buyer in a series of instantaneous back-toback transactions. Each party in the chain has title
for an instant but does not take actual physical
delivery (other than the ultimate buyer which, in
no case, will be the Bank.’’)).
51 26 OCC Q.J. 46, 2007 WL 5122911 (Oct. 19,
2006).
52 See also OCC Bulletin 2015–35 (Aug. 4, 2015)
(noting that a physical commodity that a bank
acquired and then immediately sold by transitory
title transfer would not be included in the bank’s
physical inventory of that commodity).
53 In contrast to transitory title transfers, the OCC
considers a commodity held by warehouse receipt
for more than a legal instant to entail physical
possession of the commodity. See OCC Bulletin
2015–35 (‘‘[A] bank that satisfies certain conditions
may engage in physical commodity transactions (for
example, by buying or selling title to a commodity
via a warehouse receipt or bill of lading) to manage
the risks of commodity derivatives.’’); Interpretive
Letter 684 (Aug. 4, 1995), 1995 WL 550219
(recognizing physical possession of a commodity by
warehouse receipt). The OCC notes that the
customary activities relating to, or risks attendant
to, commodity ownership by warehouse receipt are
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banks may have questions about the
permissibility of specific transitory title
transfer transactions. The fact-specific
nature of these issues merits a case-bycase review to determine the
permissibility of the transaction. The
OCC will continue to review requests
for interpretive opinions on the
permissibility of individual transactions
proposed by a bank. Should the OCC
become aware of additional risks that
suggest transitory title transfer activity
presents risks more closely akin to the
risks of physical metal holdings, the
OCC may reconsider the treatment of
transitory title transfer transactions.
ask the OCC for a review of the specific
holding or activity.
D. Divestiture Period
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq., (RFA), requires an
agency, in connection with a final rule,
to prepare a Final Regulatory Flexibility
Analysis describing the impact of the
rule on small entities (defined by the
Small Business Administration (SBA)
for purposes of the RFA to include
banking entities with total assets of $550
million or less) or to certify that the rule
will not have a significant economic
impact on a substantial number of small
entities.
As of December 31, 2015, the OCC
supervised 1,032 small entities.55
Although the rule applies to all OCCsupervised small entities, and thus
affects a substantial number of small
entities, no small entities supervised by
the OCC currently buy or sell metal in
a physical form primarily suited to
commercial or industrial use for the
purpose of dealing or investing in that
metal. Thus, the rule will not have a
substantial impact on any OCCsupervised small entities.
Therefore, the OCC certifies that the
final rule will not have a significant
economic impact on a substantial
number of OCC-supervised small
entities.
The final rule prohibits banks from
dealing or investing in industrial or
commercial metal. However, in
response to a request from a commenter,
the final rule provides a divestiture
period for banks that acquired industrial
or commercial metal through dealing or
investing in that metal before the
effective date of the rule.54 Under the
divestiture provision, banks must
dispose of such metal as soon as
practicable, but not later than one year
from the effective date of the regulation.
The OCC may grant up to four separate
one-year extensions of this divestiture
period for a national bank that makes a
good faith effort to dispose of the metal
and the bank’s retention of the metal is
not inconsistent with its safe and sound
operation. The divestiture provision
applies only to existing holdings;
national banks may not acquire
additional holdings of industrial and
commercial metal through dealing or
investing activities during, or after, the
divestiture period.
This divestiture period is generally
consistent with the OCC’s approach to
other nonconforming assets. Banks with
questions about the permissibility of
activities or holdings involving
industrial or commercial metal should
distinguishable from those involving transitory title
transfer. For example, Interpretive Letter 684
provides that the OCC expects a bank engaged in
physical commodity hedging, either through
warehouse receipt or ‘‘pass-through’’ delivery, to
adopt and maintain ‘‘safeguards designed to manage
the risks associated with storing, transporting, and
disposing of commodities of which the bank has
taken delivery, including policies and procedures
designed to ensure that the bank has adequate
levels of insurance (including insurance for
environmental liabilities) which, after deductions,
are commensurate with the risks assumed.’’
54 The final rule provides a divestiture period for
both national banks and FSAs. The OCC does not
expect that a divestiture period will be necessary
for FSAs and most national banks. However, in
order to ensure an orderly liquidation process for
all institutions that hold metal subject to this
prohibition, the divestiture provision is available to
both national banks and FSAs.
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IV. Regulatory Analysis
Paperwork Reduction Act
Under the Paperwork Reduction Act,
44 U.S.C. 3501–3520, the OCC may not
conduct or sponsor, and a person is not
required to respond to, an information
collection unless the information
collection displays a valid Office of
Management and Budget (OMB) control
number. This final rule does not
introduce any new collections of
information, therefore, it does not
require a submission to OMB.
Unfunded Mandates Reform Act of 1995
Determination
The OCC analyzed the final rule
under the factors set forth in the
Unfunded Mandates Reform Act of 1995
(2 U.S.C. 1532). Under this analysis, the
55 The OCC calculated the number of small
entities using the SBA’s size thresholds for
commercial banks and savings institutions, and
trust companies, which are $550 million and $38.5
million, respectively. Consistent with the General
Principles of Affiliation, 13 CFR 121.103(a), the
OCC counted the assets of affiliated financial
institutions when determining whether to classify
a national bank or FSA as a small entity. The OCC
used December 31, 2015, to determine size because
a ‘‘financial institution’s assets are determined by
averaging the assets reported on its four quarterly
financial statements for the preceding year.’’ See
footnote 8 of the SBA’s Table of Size Standards.
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OCC considered whether the rule
includes a federal mandate that may
result in the expenditure by state, local,
and Tribal governments, in the
aggregate, or by the private sector, of
$100 million or more in any one year
(adjusted annually for inflation).
Although the final rule would apply
to all OCC-supervised institutions, very
few of these institutions are currently
involved in activities involving dealing
or investing in copper or other metals in
a physical form primarily suited to
commercial or industrial use.
While the final rule may prevent
OCC-supervised institutions from
realizing potential gains from prohibited
investments in physical metals, the rule
also may protect them from realizing
potential losses from investments in
physical metals. The OCC is not able to
estimate these potential gains or losses
because they will depend on future
fluctuations in the prices of the various
physical metals. However, the OCC does
expect OCC-supervised institutions to
be able to achieve comparable returns in
alternative non-prohibited investment
opportunities. Thus, the OCC estimates
that the opportunity cost of the final
rule will be near zero.
The final rule may impose one-time
costs on affected institutions with
respect to the disposal of current
physical metal inventory that a bank
may not deal in or invest in under the
rule. This cost will depend to some
extent on the amount of physical metal
inventory that affected institutions must
dispose of. Given the divestiture period
in the final rule, a gradual sell-off
should not affect market prices and the
affected institutions would receive fair
value for their metals. Under these
circumstances, the OCC estimates that
the disposal costs will also be minimal.
Finally, by establishing that buying
and selling physical metal in
commercial or industrial form is
generally not part of the business of
banking, the rule implies that customers
of OCC-supervised institutions will
have to identify another reliable source
of supply of physical metals and that
OCC-supervised institutions will be less
able to compete with non-bank metals
dealers. Given how technology has
made the physical metals markets more
accessible, the OCC expects bank
customers will face minimal costs
associated with identifying another
supplier of physical metals. The OCC
also expects that losing the ability to
compete with non-bank metal dealers
will not significantly detract from the
strength of OCC-supervised institutions,
especially given that the final rule
would recognize several business-ofbanking incidental exceptions to the
VerDate Sep<11>2014
18:11 Dec 29, 2016
Jkt 241001
prohibition on buying and selling
physical metal. These permissible
activities should enable OCC-supervised
institutions to continue to provide
metals related services to bank
customers that do not involve dealing or
investing in commercial and industrial
metals.
For the reasons described above, the
OCC has determined that the final rule
would not result in expenditures by
state, local, and Tribal governments, or
by the private sector, of $100 million or
more. Accordingly, the OCC has not
prepared a written statement to
accompany the final rule.
List of Subjects in 12 CFR Part 7
Banks, banking, Computer
technology, Credit, Federal savings
associations, Insurance, Investments,
Metals, National banks, Reporting and
recordkeeping requirements, Securities,
Surety bonds.
For the reasons set forth in the
preamble, OCC amends 12 CFR part 7 as
follows:
PART 7—ACTIVITIES AND
OPERATIONS
1. The authority citation for part 7 is
revised to read as follows:
■
Authority: 12 U.S.C. 1 et seq., 25b, 71, 71a,
92, 92a, 93, 93a, 371, 371a, 481, 484, 1463,
1464, 1818, and 5412(b)(2)(B).
2. Add § 7.1022 to subpart A to read
as follows:
■
§ 7.1022 National banks’ authority to buy
and sell exchange, coin, and bullion.
(a) In this section, industrial or
commercial metal means metal
(including an alloy) in a physical form
primarily suited to industrial or
commercial use, for example, copper
cathodes.
(b) Scope of authorization. Section
24(Seventh) of the National Bank Act
authorizes national banks to buy and
sell exchange, coin, and bullion.
Industrial or commercial metal is not
exchange, coin, and bullion within the
meaning of this authorization.
(c) Buying and selling metal as part of
or incidental to the business of banking.
Section 24(Seventh) authorizes national
banks to engage in activities that are
part of, or incidental to, the business of
banking. Buying and selling industrial
or commercial metal for the purpose of
dealing or investing in that metal is not
part of or incidental to the business of
banking pursuant to section
24(Seventh). Accordingly, national
banks may not acquire industrial or
commercial metal for purposes of
dealing or investing.
PO 00000
Frm 00022
Fmt 4700
Sfmt 4700
(d) Other authorities not affected.
This section shall not be construed to
preclude a national bank from acquiring
or selling metal in connection with its
incidental authority to foreclose on loan
collateral, compromise doubtful claims,
or avoid loss in connection with a debt
previously contracted. This section also
shall not be construed to preclude a
national bank from buying and selling
physical metal to hedge a derivative for
which that metal is the reference asset
so long as the amount of the physical
metal used for hedging purposes is
nominal.
(e) Nonconforming holdings. National
banks that hold industrial or
commercial metal as a result of dealing
or investing in that metal shall dispose
of such metal as soon as practicable, but
not later than one year from the effective
date of this regulation. The OCC may
grant up to four separate one-year
extensions to dispose of industrial or
commercial metal if a national bank
makes a good faith effort to dispose of
the metal and retention of the metal for
an additional year is not inconsistent
with the safe and sound operation of the
bank.
■ 3. Add § 7.1023 to subpart A to read
as follows:
§ 7.1023 Federal savings associations,
prohibition on industrial or commercial
metal dealing or investing.
(a) In this section, industrial or
commercial metal means metal
(including an alloy) in a physical form
primarily suited to industrial or
commercial use, for example, copper
cathodes.
(b) Federal savings associations may
not deal or invest in industrial or
commercial metal.
(c) Other authorities not affected. This
section shall not be construed to
preclude a federal savings association
from acquiring or selling metal in
connection with its authority to
foreclose on loan collateral, compromise
doubtful claims, or avoid loss in
connection with a debt previously
contracted.
(d) Nonconforming holdings. Federal
savings associations that hold industrial
or commercial metal as a result of
dealing or investing in that metal shall
dispose of such metal as soon as
practicable, but not later than one year
from the effective date of this regulation.
The OCC may grant up to four separate
one-year extensions to dispose of
industrial or commercial metal if a
federal savings association makes a good
faith effort to dispose of the metal and
retention of the metal for an additional
year is not inconsistent with safe and
sound operation of the association.
E:\FR\FM\30DER1.SGM
30DER1
Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Rules and Regulations
Dated: December 15, 2016.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2016–31572 Filed 12–29–16; 8:45 am]
BILLING CODE 4810–33–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2015–3142; Directorate
Identifier 2015–NM–003–AD; Amendment
39–18728; AD 2016–25–02]
RIN 2120–AA64
Airworthiness Directives; The Boeing
Company Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule; correction.
AGENCY:
The FAA is correcting an
airworthiness directive (AD) that
published in the Federal Register. That
AD applies to certain The Boeing
Company Model 787–8 airplanes. As
published, the amendment number
specified in the preamble and regulatory
text is incorrect. This document corrects
that error. In all other respects, the
original document remains the same.
DATES: This final rule is effective
January 20, 2017.
The Director of the Federal Register
approved the incorporation by reference
of a certain publication listed in this AD
as of January 20, 2017 (81 FR 90955,
December 16, 2016).
ADDRESSES: For service information
identified in this final rule, contact
Boeing Commercial Airplanes,
Attention: Contractual & Data Services
(C&DS), 2600 Westminster Blvd., MC
110–SK57, Seal Beach, CA 90740;
telephone 562–797–1717; Internet
https://www.myboeingfleet.com. You
may view this referenced service
information at the FAA, Transport
Airplane Directorate, 1601 Lind Avenue
SW., Renton, WA. For information on
the availability of this material at the
FAA, call 425–227–1221. It is also
available on the Internet at https://
www.regulations.gov by searching for
and locating Docket No. FAA–2015–
3142.
SUMMARY:
srobinson on DSK5SPTVN1PROD with RULES
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov; or in person at the
Docket Management Facility between 9
a.m. and 5 p.m., Monday through
Friday, except Federal holidays. The AD
docket contains this AD, the regulatory
VerDate Sep<11>2014
18:11 Dec 29, 2016
Jkt 241001
evaluation, any comments received, and
other information. The address for the
Docket Office (phone: 800–647–5527) is
Docket Management Facility, U.S.
Department of Transportation, Docket
Operations, M–30, West Building
Ground Floor, Room W12–140, 1200
New Jersey Avenue SE., Washington,
DC 20590.
FOR FURTHER INFORMATION CONTACT: Fnu
Winarto, Aerospace Engineer, Systems
and Equipment Branch, ANM–130S,
FAA, Seattle Aircraft Certification
Office (ACO), 1601 Lind Avenue SW.,
Renton, WA 98057–3356; phone: 425–
917–6659; fax: 425–917–6590; email:
fnu.winarto@faa.gov.
SUPPLEMENTARY INFORMATION:
Airworthiness Directive 2016–25–02 (81
FR 90955, December 16, 2016), requires
installing markers to limit the hydraulic
system fluid used to a specific brand,
doing hydraulic fluid tests of the
hydraulic systems, replacing hydraulic
system fluid if necessary, and doing all
applicable related investigative and
corrective actions for certain The Boeing
Company Model 787–8 airplanes.
Need for the Correction
As published, the amendment number
specified in the preamble and regulatory
text is incorrect. The incorrectly
specified number was Amendment 39–
18725; the correct number is
Amendment 39–18728.
Related Service Information Under
1 CFR Part 51
We have reviewed Boeing Alert
Service Bulletin B787–81205–
SB270026–00, Issue 002, dated June 13,
2016. This service information describes
procedures for installing markers to
limit the hydraulic system fluid used to
a specific brand, doing hydraulic fluid
tests of the hydraulic systems, replacing
the hydraulic system fluid if necessary,
and related investigative and corrective
actions. This service information is
reasonably available because the
interested parties have access to it
through their normal course of business
or by the means identified in the
ADDRESSES section.
Correction of Publication
This document corrects an error and
correctly adds the AD as an amendment
to 14 CFR 39.13. Although no other part
of the preamble or regulatory
information has been corrected, we are
publishing the entire rule in the Federal
Register.
The effective date of this AD remains
January 20, 2017.
Since this action only corrects an
amendment number, it has no adverse
economic impact and imposes no
PO 00000
Frm 00023
Fmt 4700
Sfmt 4700
96361
additional burden on any person.
Therefore, we have determined that
notice and public procedures are
unnecessary.
List of Subjects in 14 CFR Part 39
Air transportation, Aircraft, Aviation
safety, Incorporation by reference,
Safety.
Adoption of the Correction
Accordingly, pursuant to the
authority delegated to me by the
Administrator, the Federal Aviation
Administration amends part 39 of the
Federal Aviation Regulations (14 CFR
part 39) as follows:
PART 39—AIRWORTHINESS
DIRECTIVES
1. The authority citation for part 39
continues to read as follows:
■
Authority: 49 U.S.C. 106(g), 40113, 44701.
§ 39.13
[Corrected]
2. The FAA amends § 39.13 by adding
the following new airworthiness
directive (AD):
■
2016–25–02 The Boeing Company:
Amendment 39–18728; Docket No.
FAA–2015–3142; Directorate Identifier
2015–NM–003–AD.
(a) Effective Date
This AD is effective January 20, 2017.
(b) Affected ADs
None.
(c) Applicability
This AD applies to The Boeing Company
Model 787–8 series airplanes, certificated in
any category, as identified in Boeing Alert
Service Bulletin B787–81205–SB270026–00,
Issue 002, dated June 13, 2016.
(d) Subject
Air Transport Association (ATA) of
America Code 27, Flight Control Systems.
(e) Unsafe Condition
This AD was prompted by reports of the
accumulation of very fine particle deposits in
the power control unit (PCU) electrohydraulic servo valves (EHSVs) used in the
flight control system; this accumulation
caused degraded performance due to reduced
EHSV internal hydraulic supply pressures,
resulting in the display of PCU fault status
messages from the engine indication and
crew alerting system (EICAS). We are issuing
this AD to prevent failure of flight control
hydraulic PCUs, which could lead to reduced
controllability of the airplane.
(f) Compliance
Comply with this AD within the
compliance times specified, unless already
done.
(g) Marker Installation
Within 36 months after the effective date
of this AD, install markers to allow servicing
E:\FR\FM\30DER1.SGM
30DER1
Agencies
[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Rules and Regulations]
[Pages 96353-96361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31572]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 7
[Docket ID OCC-2016-0022]
RIN 1557-AD93
Industrial and Commercial Metals
AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The OCC is finalizing a rule to prohibit national banks and
federal savings associations from dealing or investing in industrial or
commercial metals.
DATES: This final rule is effective April 1, 2017.
FOR FURTHER INFORMATION CONTACT: Casey Scott Laxton, Counsel, or Margo
Dey, Counsel, Securities and Corporate Practices Division, (202) 649-
5510; Carl Kaminski, Special Counsel, Legislative and Regulatory
Activities Division, (202) 649-5490; or, for persons who are deaf or
hard of hearing, TTY, (202) 649-5597, 400 7th Street SW., Washington,
DC 22019.
SUPPLEMENTARY INFORMATION:
I. Background
In September 2016, the OCC issued a Notice of Proposed Rulemaking
(NPRM) to prohibit national banks from dealing or investing in
industrial or commercial metals.\1\ The OCC proposed to: (i) Exclude
industrial and commercial metals from the terms ``exchange,'' ``coin,''
and ``bullion'' in the ``powers clause'' of the National Bank Act at 12
U.S.C. 24(Seventh); and (ii) provide that dealing or investing in
industrial or commercial metal is not part of, or incidental to, the
business of banking. The proposed prohibitions were generally
consistent with recommendations made by the U.S. Senate Permanent
Subcommittee on Investigations in 2014,\2\ as well as recommendations
described in a September 2016 report to the U.S. Congress and the
Financial Stability Oversight Council (FSOC) prepared by the OCC, the
Board of Governors of the Federal Reserve System (``Board''), and the
Federal Deposit Insurance Corporation pursuant to section 620 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'').\3\
---------------------------------------------------------------------------
\1\ 81 FR 63428 (Sept. 15, 2016).
\2\ ``Wall Street Bank Involvement with Physical Commodities,''
U.S. Senate Permanent Subcommittee on Investigations, available at:
https://www.hsgac.senate.gov/download/report-wall-street-involvement-with-physical-commodities (``PSI Report'').
\3\ ``Report to Congress and the Financial Stability Oversight
Council Pursuant to Section 620 of the Dodd-Frank Act,'' at 86-90
(September 2016), available at: https://www.occ.gov/news-issuances/news-releases/2016/nr-ia-2016-107a.pdf (``620 Study''). Section 620
of the Dodd-Frank Act required the federal banking agencies to
conduct a study and prepare a report, including recommendations, on
the types of activities and investments permissible for banking
entities, the associated risks, and how banking entities mitigate
those risks. In a parallel action, the Board also issued a proposed
rule in September 2016. The proposed Board rule addressed the
physical commodities activities and investments of banking holding
companies and financial holding companies, including copper. Risk-
Based Capital and Other Regulatory Requirements for Activities of
Financial Holding Companies Related to Physical Commodities and
Risk-Based Capital Requirements for Merchant Banking Investments, 81
FR 67220 (Sept. 30, 2016).
---------------------------------------------------------------------------
A national bank may engage in activities that are part of, or
incidental to, the business of banking under 12 U.S.C. 24(Seventh).
Section 24(Seventh) lists several activities that are part of the
business of banking; for example, it expressly provides that national
banks may buy and sell exchange, coin, and bullion. In addition to
these enumerated powers, section 24(Seventh) authorizes national banks
to exercise all such incidental powers as shall be necessary to carry
on the business of banking. National banks also are authorized to
engage in any other activities not expressly enumerated in the statute
that the Comptroller of the Currency
[[Page 96354]]
reasonably determines are part of the business of banking.\4\
---------------------------------------------------------------------------
\4\ NationsBank of N.C., N.A. v. Var. Ann. Life. Ins. Co.
(VALIC), 513 U.S. 251, 258-59 (1995).
---------------------------------------------------------------------------
In Interpretive Letter 693,\5\ issued approximately twenty-one
years ago, the OCC authorized national banks to buy and sell copper on
the grounds that trading copper was becoming increasingly similar to
trading gold, silver, platinum, and palladium. The letter observed that
copper was traded in liquid markets; that it was traded in a form
standardized as to weight and purity; and that the bank seeking
authority to engage in the activity traded copper under policies and
procedures similar to those that governed the bank's trading of
precious metals. The letter concluded that national banks could buy and
sell copper under the express authority to buy and sell coin and
bullion and as part of or incidental to the business of banking. The
scope of the authorization in Interpretive Letter 693 was sufficiently
broad to permit national banks to buy and sell copper in the form of
cathodes, which are used for industrial purposes.
---------------------------------------------------------------------------
\5\ 1995 WL 788816 (Nov. 14, 1995).
---------------------------------------------------------------------------
In the NPRM, the OCC proposed to reconsider the interpretation set
forth in Interpretive Letter 693.
Now, the OCC is finalizing the NPRM and revising its regulations to
prohibit national banks from dealing and investing in a metal (or
alloy), including copper, in a form primarily suited to industrial or
commercial use (industrial or commercial metal).\6\ The OCC has added a
divestiture period to the final rule, provided clarifying language to
the dealing and investing prohibition for national banks, and clarified
federal savings associations' (FSA) authority to engage in activity
that is not dealing or investing, but is otherwise finalizing the NPRM
as proposed. The final rule: (i) Excludes industrial and commercial
metals from the terms ``exchange,'' ``coin,'' and ``bullion'' in 12
U.S.C. 24(Seventh); and (ii) provides that dealing or investing in
industrial or commercial metal is not part of, or incidental to, the
business of banking. Examples of metals and alloys in a form primarily
suited for industrial or commercial use include copper cathodes,
aluminum T-bars, and gold jewelry. For the reasons stated in this
preamble, the OCC has concluded that dealing or investing in these
metals is not appropriate for national banks. The final rule supersedes
Interpretive Letter 693.\7\
---------------------------------------------------------------------------
\6\ The OCC considers the definition of industrial or commercial
metal to include a warehouse receipt for such metal.
\7\ See Nat'l Cable & Telecomms. Ass'n v. Brand X Internet
Servs., 545 U.S. 967, 981-82 (2005) (agency reconsiderations of
prior interpretations entitled to judicial deference so long as the
agency adequately explains the reasons for the change); Motor
Vehicle Manufacturers Association of the U.S., Inc. v. State Farm
Mutual Automobile Insurance Company, 463 U.S. 29, 43 (1983)
(``agency must examine the relevant data and articulate a
satisfactory explanation for its action including a `rational
connection between the facts found and the choice made' '').
---------------------------------------------------------------------------
The final rule also applies to FSAs. The Home Owners' Loan Act does
not expressly authorize FSAs to buy or sell exchange, coin, and
bullion.\8\ While FSAs have incidental authority to buy and sell
precious metals in certain cases and to sell gold and silver coins
minted by the U.S. Treasury, the OCC has not identified any precedent
authorizing FSAs to buy and sell any industrial or commercial metal.\9\
The OCC does not interpret FSAs' powers to buy and sell metals to be
broader than those of national banks.\10\ To avoid doubt, and to
further integrate national bank and FSA regulations, the final rule
prohibits FSAs from dealing or investing in industrial or commercial
metal.\11\
---------------------------------------------------------------------------
\8\ See 12 U.S.C. 1464(c).
\9\ See, e.g., OTS Op. Ch. Couns. P-2006-1 (Mar. 6, 2006), 2006
WL 6195026 (engaging in precious metal transactions on behalf of
customers); Gold Bullion Coin Transactions, 51 FR 34950 (Oct. 1,
1986); Letter from Jack D. Smith, Deputy General Counsel, Federal
Home Loan Bank Board, 1988 WL 1021651 (May 18, 1988). All precedents
(orders, resolutions, determinations, agreements, regulations,
interpretive rules, interpretations, guidelines, procedures, and
other advisory materials) made, prescribed, or allowed to become
effective by the former Office of Thrift Supervision or its Director
that apply to FSAs remain effective until the OCC modifies,
terminates, sets aside, or supersedes those precedents. 12 U.S.C.
5414(b).
\10\ See OTS Op. Ch. Couns. P-2006-1 (Mar. 6, 2006), 2006 WL
6195026 (permissibility of FSA metal activity is evaluated under a
four-part test referencing the activities of national banks).
\11\ The final rule indirectly applies to federal branches and
agencies of foreign banks because they operate with the same rights
and privileges (and subject to the same duties, restrictions,
penalties, liabilities, conditions, and limitations) as national
banks. 12 CFR 28.13(a)(1). The final rule also indirectly applies to
insured state banks and state savings associations. See 12 U.S.C.
1831a, 1831e.
---------------------------------------------------------------------------
II. Summary of the Comments on the Notice of Proposed Rulemaking
The OCC received four comments on the NPRM. Two comments were from
financial industry trade associations and two were from individuals.
While the comments generally were supportive of the NPRM, the trade
association commenters requested that the OCC confirm the
permissibility of certain lending and leasing transactions involving
physical metals and expressed concern about the potential impact of the
rulemaking on the liquidity of the copper market. A detailed discussion
of the commenters' concerns and the OCC's response follows.
A. Prohibition on Dealing and Investing for Industrial and Commercial
Metal (Including Copper)
Two commenters offered general views on the proposed dealing and
investing prohibition for industrial and commercial metal, including
copper, under the proposed rule. One was generally supportive of the
NPRM's treatment of copper cathodes as an industrial and commercial
metal. This commenter noted the proposal was consistent with banks'
treatment of copper, as banks currently buy and sell copper based on
its value for industrial and commercial purposes rather than as a store
of value. The commenter also offered additional support for the
rulemaking, noting that banks that own copper are exposed to large
fluctuations in copper prices, encounter potential conflicts of
interest between house positions and client positions, and may be able
to manipulate copper markets through large physical positions. This
commenter asserted that the proposed treatment is appropriate because
bank copper trading activities more closely resemble commercial
enterprises rather than a banking business. The commenter pointed to
the PSI Report and 620 Study to support these comments.
The second commenter expressed concern that the OCC has not
demonstrated a compelling reason to change its 1995 copper
interpretation. The commenter argued that the reasons the OCC approved
copper activities in Interpretive Letter 693 are still valid today and
that the OCC should not pursue the rulemaking in the absence of a
compelling need or corresponding regulatory benefit. After carefully
considering these comments, the OCC continues to believe that dealing
or investing in copper cathodes, and other industrial or commercial
metal, is not appropriate for national banks. As the OCC explained in
the NPRM, events subsequent to Interpretive Letter 693 have confirmed
copper is a base metal and thus, should be distinguished from precious
metals that are not held in industrial or commercial form.\12\ For
example, in 2000, the London Metals Exchange (``LME'') introduced a
futures contract on a base metal index containing copper, aluminum, and
[[Page 96355]]
zinc.\13\ In 2006, the LME followed with ``mini'' futures for copper,
aluminum and zinc. By contrast, firms have launched exchange-traded
funds (ETFs) that invest solely in gold, silver, palladium, platinum,
or some combination thereof, indicating a widespread belief that these
metals are a store of value. The OCC notes there are no copper ETFs. In
addition, the OCC understands that national banks that trade copper
treat it as a base metal and trade it alongside aluminum and zinc
rather than gold and silver. Finally, the OCC considered the issues and
risks identified in the PSI Report with respect to physical copper.\14\
The commenter's observations do not negate the information provided in
the NPRM and these facts demonstrate that the OCC has adequately
described its reasons for changing its 1995 interpretation.
---------------------------------------------------------------------------
\12\ 81 FR 63430, n.21.
\13\ The LME describes itself as ``the world centre for
industrial metals trading.'' See https://www.lme.com/.
\14\ See, e.g., PSI Report at 362-396.
---------------------------------------------------------------------------
B. Physical Holdings
The preamble to the NPRM explained that the OCC did not consider
the proposed rule to prohibit national banks from buying or selling
metal through a transitory title transfer entered into as part of a
customer-driven financial intermediation business.\15\ The OCC
explained that metal owned through a transitory title transfer
typically does not entail physical possession of a commodity; the
ownership occurs solely to facilitate the underlying transaction and
lasts only for a moment in time. However, the OCC invited comment on
whether transitory title transfers involving metals present risks that
warrant treating such transactions as physical holdings.
---------------------------------------------------------------------------
\15\ 81 FR 63431.
---------------------------------------------------------------------------
Three commenters addressed transitory title transfers. Two
commenters generally supported the OCC's proposed treatment of
transitory title transfers. One of these commenters agreed with the
assertion in the NPRM that there is no physical possession of the metal
in transitory title transfers. This commenter noted that the risks of
legal liability typically associated with physical commodity positions
are not present in transitory title transfers and that these
transactions more closely resemble customer-driven, cash-settled
commodity derivatives than physical positions. Another commenter also
supported the treatment of transitory title transfers, but suggested
the final rule text should limit transitory title transfers to
customer-driven financial intermediation transactions that are part of
the business of banking. A third commenter disagreed that transitory
title transfers are different from dealing and investing in physical
metal just because the bank holds the metal for a legal instant. As
discussed in detail below, the OCC continues to believe that transitory
title transfers do not entail physical possession of industrial and
commercial metals. The OCC also notes that relevant precedent already
provides that transitory title transfers must be part of a customer-
driven financial intermediation business.\16\ Therefore, the OCC is
finalizing the rule as proposed.
---------------------------------------------------------------------------
\16\ Interpretive Letter 1073, 26 OCC Q.J. 46, 2007 WL 5122911
(Oct. 19, 2006).
---------------------------------------------------------------------------
In addition to addressing transitory title transfers, one of the
commenters also requested that the OCC confirm that interests in
unallocated metal accounts are not physical holdings under the final
rule. The commenter identified various activities in which national
banks are engaged that could involve an interest in an unallocated
metals account. The OCC notes that these activities are fact specific,
and determinations about fact-specific activities need to be evaluated
on a case-by-case basis. Therefore, the OCC believes it is appropriate
to address the applicability of the final rule to these activities on a
case-by-case basis. National banks with questions regarding the
permissibility of transactions that involve unallocated metals accounts
should discuss the issue with the OCC. The OCC is willing to entertain
requests for such determinations, consistent with its historical
practice of providing interpretive opinions in cases where there is
doubt about the permissibility of particular activities.
C. Reverse Repurchase Agreements
The NPRM explained that the OCC views national banks' lending
authority to include reverse repurchase agreements that are the
functional and economic equivalent of secured loans.\17\ Banks may use
commodity reverse repurchase agreements to finance customer
inventory.\18\ Using a standard reverse repurchase agreement for metal
to provide financing for a bank customer rather than a traditional bank
loan ordinarily does not indicate dealing or investing in the metal.
However, the NPRM noted that the facts and circumstances of a
particular transaction may warrant a different conclusion. For example,
if a bank incurs commodity price risk or pledges, sells, or
rehypothecates metal acquired under reverse repurchase agreements, the
NPRM provided that the OCC may view the transaction to be dealing or
investing in the metal. The OCC invited comment on the treatment of
reverse repurchase agreements under the proposed rule.
---------------------------------------------------------------------------
\17\ 81 FR 63431.
\18\ 12 CFR 211.4(a)(7).
---------------------------------------------------------------------------
Two commenters addressed the treatment of reverse repurchase
agreements. One suggested the OCC prohibit all reverse repurchase
agreements where there is commodity market or liquidity risk. This
commenter wrote that a prohibition is a better approach than a facts
and circumstances review in light of limited OCC resources. The other
commenter asserted that OCC should confirm that these types of reverse
repurchase agreements are permissible activities not affected by the
rule. This commenter noted that the reuse of the collateral is a long-
standing practice in asset-based financing and therefore pledging,
selling, or rehypothecating metal owned under a reverse repurchase
agreement should not be viewed as indicia of dealing activity.
The OCC continues to have concerns that reverse repurchase
agreements that involve commodity price risk or that involve pledging,
selling, or rehypothecating metal could be structured in some
circumstances in a manner that constitutes dealing or investing
activity. The OCC recognizes, as a commenter suggested, that banks may
enter into hedges to mitigate price risk that exists at the conclusion
of certain reverse repurchase agreements and may pledge collateral for
the purpose of funding its customer financing activities. Structuring a
transaction in these ways could, in some circumstances, reduce indicia
of investing or dealing activity. However, the OCC does not believe it
is appropriate to conclude that all reverse repurchase agreements that
involve commodity price risk or pledging, etc. of collateral are
permissible. Therefore, the OCC continues to believe that it is
appropriate to evaluate reverse repurchase agreements that involve
commodity price risk or pledging, etc. of collateral on a facts and
circumstances basis, as appropriate. This approach will allow the OCC
an opportunity to evaluate transactions in context and to consider
relevant facts before reaching a determination as to whether a
transaction involves dealing or investing. The OCC is therefore
declining to make the changes the commenters have requested.
D. Other Permissible Transactions
The proposed rule identified two incidental authorities under which
[[Page 96356]]
acquiring and selling metal would remain permissible for national
banks: first, collateral foreclosure activities designed to mitigate
loan losses; \19\ second, nominal physical hedges of customer-driven
commodity derivatives. The OCC also explained in the preamble to the
NPRM that a bank may buy and sell metal in conjunction with certain
leasing authorities.\20\
---------------------------------------------------------------------------
\19\ 81 FR 63433.
\20\ 81 FR 63431.
---------------------------------------------------------------------------
One commenter addressed the proposed treatment of nominal hedging
activities. This commenter suggested that the OCC require banks to
disclose hedging amounts to the OCC. This commenter also suggested that
the OCC require the hedge be designed to reduce risk in order to
prevent commodity speculation. The OCC notes that it monitors bank
hedging activity through its regular course of bank supervision.
Additionally, banks that engage in commodity hedging activities already
must do so in accordance with applicable law, including requirements
that the hedge be designed to reduce risk.\21\ For these reasons, the
OCC does not believe that the changes this commenter suggested are
necessary.
---------------------------------------------------------------------------
\21\ See, e.g., Interpretive Letter 684 (Aug. 4, 1995) 1995 WL
550219; OCC Bulletin 2015-3 (Aug. 4, 2015); 12 CFR 44.3(b) and
44.5(a) (Volcker Rule requirement that hedges be designed to reduce
or otherwise significantly mitigate one or more specific
identifiable risks).
---------------------------------------------------------------------------
Another commenter asked that the OCC modify the final rule to
expressly permit certain metals-based financing activities. The
commenter described several metal leasing and metal consignment
transactions. As explained in the NPRM and below, banks may not buy and
sell industrial or commercial metal for the purposes of dealing or
investing in that metal. However, banks may continue to buy and sell
industrial or commercial metal under other incidental authorities that
do not involve dealing or investing. To the extent a bank proposes to
engage in a metals-based transaction that presents an interpretive
issue(s) under the authorities provided for in 12 U.S.C. 24(Seventh),
the OCC will address permissibility on a facts and circumstances basis.
The OCC may issue interpretive analysis, as appropriate.
E. Existing Holdings
The OCC solicited comment in the NPRM on the treatment of existing
holdings of industrial and commercial metals. Specifically, the OCC
asked whether five years to divest non-conforming assets, with the
possibility of a five-year extension, would be an appropriate period of
time. The OCC also asked whether there were compelling reasons to
grandfather existing industrial and commercial metal holdings
indefinitely.\22\
---------------------------------------------------------------------------
\22\ 81 FR 63432.
---------------------------------------------------------------------------
Two commenters addressed the issue of existing holdings of
industrial and commercial metal. One commenter argued industrial and
commercial metal held before the conformance date should be
grandfathered because doing so would limit negative effects on copper
markets and bank customers. This commenter also asked that the text of
the rule include a minimum of five years to conform to the prohibition,
arguing this would minimize the impact of the rule. Another commenter
did not support allowing the banks additional time to divest their
physical metals holdings.
National banks do not currently engage in significant dealing or
investing activities in relation to physical industrial and commercial
metal. Nor do national banks currently hold significant stores of
industrial and commercial metal. Therefore, the OCC finds no compelling
reason to grandfather existing activities. However, the OCC does
believe that a short divestiture period would be appropriate. Given
national banks' limited industrial and commercial metal activities, the
OCC concludes that a full five-year divestiture period is not
necessary. The OCC is therefore including a provision in the final rule
that requires national banks to divest existing holdings of industrial
and commercial metal acquired through dealing or investing activities
as soon as practicable, but not later than one year from the effective
date of the rule.\23\ This provision enables the OCC to grant up to
four separate one-year extensions of this divestiture period if the
bank has made a good faith effort to dispose of the metal and the
bank's retention of the metal is not inconsistent with its safe and
sound operation. The OCC notes that the approach of granting a
divestiture period with the possibility of an extension is consistent
with the OCC's treatment of other types of nonconforming assets.\24\
This divestiture provision applies only to existing holdings; national
banks may not acquire additional holdings of industrial and commercial
metal through dealing or investing activities during, or after, the
divestiture period.
---------------------------------------------------------------------------
\23\ The final rule provides a divestiture period for both
national banks and FSAs. The OCC does not expect that a divestiture
period will be necessary for FSAs and most national banks. However,
in order to ensure an orderly asset liquidation process for all
institutions that hold metal subject to this prohibition, the
divestiture provision is available to both national banks and FSAs.
\24\ See, e.g., 12 U.S.C. 29 (holding period for other real
estate owned).
---------------------------------------------------------------------------
F. Impact of the Rule
Three commenters discussed the impact of the proposed rule. Two
commenters noted, very generally, that they expect the rule to increase
cost for customers if finalized as proposed. One of these commenters
also suggested the proposal would have a negative impact on the copper
market as a whole, asserting that the costs of the rule will not be
minimal. This commenter also argued there would be no regulatory
benefit to this prohibition. Another commenter said the NPRM would
reduce financial risk and conflicts of interests for banks while also
allowing the OCC to impose limits on copper and other industrial and
commercial metals.
As noted above, national banks do not currently engage in
significant dealing or investing activities in relation to physical
industrial and commercial metal. Because these markets tend to be
highly competitive, we expect that the removal of OCC-supervised
institutions as just one class of potential investors/dealers will not
have a material effect on these markets. Furthermore, as explained in
more detail below, national banks may continue to buy and sell
industrial and commercial metal under certain incidental authorities.
The OCC expects these limited permissible activities will allow banks
to continue to serve customers with interests in commercial and
industrial metals in capacities that do not involve dealing or
investing activities.
III. Description of the Final Rule
A. Industrial or Commercial Metal Is Not ``exchange, coin, and
bullion''
As noted above, the National Bank Act authorizes national banks to
buy and sell exchange, coin, and bullion. In this final rule, the OCC
is interpreting these terms to exclude metals in a form primarily
suited to industrial or commercial use.
Banking Circular 58 (BC-58) \25\ sets forth general guidelines that
apply to national banks' coin and bullion activities. It defines
``coin'' as ``coins held for their metallic value which are minted by a
government, or exact restrikes of such coins minted at a later date by
or under the authority of the issuing government.'' Contemporaneous OCC
interpretive letters elaborated that ``coin'' referred only to media of
exchange.\26\ BC-58 defines ``bullion'' as
[[Page 96357]]
``uncoined gold or silver in bar or ingot form.'' These definitions do
not encompass industrial or commercial metal.
---------------------------------------------------------------------------
\25\ BC-58 (Rev.) (Nov. 3, 1981). The OCC published the original
version in 1974.
\26\ Interpretive Letter 326 (Jan. 17, 1985), 1985 WL 202590;
Interpretive Letter 252 (Oct. 26, 1982), 1982 WL 54157; Letter from
Peter Liebesman, Assistant Director, Legal Advisory Services
Division (Feb. 18, 1982), 1982 WL 170844. But see Letter from
Richard V. Fitzgerald, Deputy Chief Counsel (Nov. 4, 1983), 1983 WL
145720 (concluding that national banks could purchase and sell the
Department of Treasury's commemorative Olympic coins based on their
metallic value even though it was unlikely that the coins would be
used as a medium of exchange).
---------------------------------------------------------------------------
Interpretive letters published after BC-58 interpreted national
banks' authority to buy coin and bullion to include other precious
metals, namely platinum and palladium. Consistent with BC-58's
definition of ``coin,'' the OCC in 1987 found that legal tender
platinum coins held for their metallic value were ``coin.'' \27\ That
same letter prohibited dealing in platinum bars. However, in 1991, the
OCC concluded that market developments warranted treating platinum bars
as bullion.\28\ The OCC also found trading in platinum bars to be
incidental to trading in platinum coins.\29\ For similar reasons, the
OCC concluded palladium was coin and bullion and national banks could
trade and deal in palladium as part of the business of banking.\30\ In
support of its position, the OCC noted that the London Platinum and
Palladium Market had linked platinum and palladium for market making
and regulatory purposes and that most of the Market's members were
banks.
---------------------------------------------------------------------------
\27\ Letter from William J. Stolte, Chief National Bank Examiner
(July 29, 1987), 1987 WL 149775.
\28\ Interpretive Letter 553 (May 2, 1991), 1991 WL 340660
(noting that (i) the financial press considered platinum coins and
bars to be bullion, and (ii) a state statute defined ``bullion'' to
include platinum).
\29\ Id.
\30\ Interpretive Letter 685 (Aug. 4, 1995), 1995 WL 550220.
---------------------------------------------------------------------------
However, other interpretive letters recognized that not every
precious metal is coin or bullion. Jewelry, the OCC determined, is
not.\31\
---------------------------------------------------------------------------
\31\ See No-Objection Letter 88-8 (May 26, 1988), 1988 WL 284872
(selling gold and silver jewelry is impermissible general
merchandising); Letter from Madonna K. Starr, Attorney (Oct. 3,
1986), 1986 WL 144029 (limited design jewelry is not exchange, coin,
or bullion).
---------------------------------------------------------------------------
The OCC has long concluded that ``exchange, coin, and bullion''
does not encompass industrial or commercial metal. The OCC believes
this conclusion is consistent with the National Bank Act and current
market practice. For example, in the mid-19th century, when Congress
passed the National Bank Act, ``bullion'' meant metal suitable for
coining, not metal suitable for making wires.\32\ The contemporary
understanding of ``bullion'' is broader--most currency is no longer
made of precious metal--but the contemporary understanding does
distinguish bullion from industrial or commercial metal. For example,
modern bullion markets trade precious metals by the kilogram.\33\ By
contrast, industrial and commercial metals markets trade base metals in
quantities suitable for industrial or commercial use.\34\ In general,
gold, silver, platinum, and palladium are bullion today because they:
---------------------------------------------------------------------------
\32\ See Act of June 22, 1874, 18 Stat. 202 (authorizing the
transfer from the U.S. bullion fund of refined gold bars bearing the
United States stamp of fineness, weight, and value, or bars from any
melt of foreign coin or bullion of standard equal to or above that
of the United States); Act of Feb. 12, 1873 Sec. 31, 17 Stat. 429
(``The bullion thus placed in the hands of the melter and refiner
shall be subjected to the several processes which may be necessary
to form it into ingots of the legal standard, and of a quality
suitable for coinage.'').
\33\ See, e.g., London Bullion Market Association, The Good
Delivery Rules for Gold and Silver Bars 11 (Mar. 2015), available at
https://www.lbma.org.uk/assets/market/gdl/GD_Rules_15_Final%2020160512.pdf; London Platinum & Palladium
Market, ``The London/Zurich Good Delivery List,'' https://www.lppm.com/good-delivery/ (visited July 19, 2016).
\34\ The LME describes itself as the ``world centre for the
trading of industrial metals--more than three quarters of all non-
ferrous metal futures business is transacted on [its] platforms.''
LME, ``About us,'' https://www.lme.com/about-us (visited July 19,
2016). The LME trades aluminum, aluminum alloys, copper, lead,
nickel, tin, and zinc. LME, ``Metals,'' https://www.lme.com/metals
(visited July 19, 2016).
---------------------------------------------------------------------------
Trade in troy ounces or grams rather than metric tons;
\35\
---------------------------------------------------------------------------
\35\ See, e.g., Bloomberg, ``Gold, Silver, and Industrial Metals
Prices,'' https://www.bloomberg.com/markets/commodities/futures/metals.
---------------------------------------------------------------------------
Trade in pure forms; \36\
---------------------------------------------------------------------------
\36\ See, e.g., London Bullion Market Association, The Good
Delivery Rules for Gold and Silver Bars 6 (Mar. 2015) (minimum
fineness for gold is 99.5 percent and for silver is 99.9 percent);
London Platinum & Palladium Market, ``The London/Zurich Good
Delivery List,'' https://www.lppm.com/good-delivery/ (minimum
fineness for platinum and palladium is 99.95 percent).
---------------------------------------------------------------------------
Trade in a form suitable for coining;
Trade as precious metals in the world's major organized
markets, including the London bullion markets; and
Are considered currency by the International Organization
for Standardization.\37\
Gold, silver, platinum, and palladium in industrial or commercial
form are not exchange, coin, or bullion.
---------------------------------------------------------------------------
\37\ ISO 4217 (Aug. 1, 2015), available at https://www.currency-iso.org/dam/downloads/lists/list_one.xls.
---------------------------------------------------------------------------
B. Dealing or Investing in Industrial or Commercial Metal Is Neither
Part of, nor Incidental to, the Business of Banking
Interpretive Letter 693 concluded that national banks could buy and
sell copper (including industrial copper) as a part of or incidental to
the business of banking. The OCC has reviewed the bases for the
conclusion in Interpretive Letter 693 that buying and selling
industrial copper is part of the business of banking, including
developments in copper markets that followed this letter. For the
following reasons, the OCC has determined that buying and selling
copper--or any other metal--in industrial or commercial form for the
purpose of dealing or investing in that metal is not part of the
business of banking.
When the OCC issued Interpretive Letter 693 in 1995, the agency
noted increasing similarity between transactions involving copper and
those transactions already conducted by national banks with respect to
gold, silver, platinum and palladium (precious metals). This increasing
similarity informed the OCC's view at that time that buying and selling
copper, including dealing and investing, was part of, or incidental to,
the business of banking. However, copper markets have not increased in
similarity to precious metal markets.\38\ Instead, as noted in detail
above, copper is generally traded as a base metal.\39\
---------------------------------------------------------------------------
\38\ Events subsequent to Interpretive Letter 693 have confirmed
copper's status as a base metal. In 2000, the LME introduced a
future on a base metal index containing copper, aluminum, lead,
nickel, tin, and zinc. Then, in 2006, it introduced ``mini'' futures
for copper, aluminum, and zinc. Similarly, many firms have launched
ETFs that invest solely in gold, silver, palladium, platinum, or
some combination thereof, indicating a widespread belief that these
metals are a store of value. However, there is no copper ETF.
Finally, the OCC understands that national banks that trade copper
treat it as a base metal and trade it alongside aluminum and zinc
rather than gold and silver.
\39\ See generally PSI Report at 364 (2014) (identifying banks,
trading firms, analysts, and exchanges that treat copper as a base
metal for trading and risk management purposes).
---------------------------------------------------------------------------
The OCC believes that dealing or investing in industrial or
commercial metals, including base and precious metals in this form, is
not the functional equivalent of dealing or investing in coin and
bullion. The paradigmatic example of functional equivalence is that a
lease is in economic substance a secured loan.\40\ But the significant
differences between dealing in industrial or commercial metals and
dealing in coin and bullion demonstrate that the former is not, in
economic substance, the same as the latter. Most importantly,
industrial and commercial metals trade in base metal markets by the ton
in cathode or other industrial form, while coin and bullion trade in
precious metal markets by the troy ounce or kilogram in bar or ingot
form.
[[Page 96358]]
In addition, banks' risk management systems distinguish between
precious metals and base metals.
---------------------------------------------------------------------------
\40\ See M&M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.2d
1377 (9th Cir. 1977).
---------------------------------------------------------------------------
The OCC has also considered other factors identified in relevant
precedent for determining whether dealing in or investing in industrial
or commercial metal is part of the business of banking.\41\ The OCC
does not believe that analysis under these factors supports a
conclusion that this activity is part of the business of banking. For
example, the OCC has not seen evidence that this activity strengthens a
bank by benefiting its customers or its business.\42\ Nor is the OCC
aware of any state-chartered banks dealing in or investing in
industrial or commercial metal.\43\ Indeed, the OCC has not identified
any precedent authorizing that activity for state banks. Such activity
would suggest dealing or investing in commercial metals may be part of
the business of banking.
---------------------------------------------------------------------------
\41\ See, e.g., Merchants' Nat'l Bank v. State Nat'l Bank, 77
U.S. 604, 648 (1871) (holding that national banks could certify
checks because the activity had ``grown out of the business needs of
the country.'').
\42\ Currently, national banks' dealing and investments in
industrial or commercial metal are limited, suggesting that the
business needs of the U.S. economy are not meaningfully affected by
national banks' dealing in industrial or commercial metal. Nor is
there evidence that the amount of revenue from industrial or
commercial metal dealing and investing meaningfully improve national
banks' financial strength. In any case, the prospect for additional
revenue alone is not sufficient to deem an activity to be part of
the business of banking. See VALIC, 513 U.S. at 258 n.2. See also
No-objection Letter 88-8 (May 26, 1988), 1988 WL 284872 (concluding
that it is impermissible for a national bank to make substantial
profits from the sale of merchandise).
\43\ See Colorado Nat'l Bank v. Bedford, 310 U.S. 41, 49-50
(1940).
---------------------------------------------------------------------------
As described above, under 12 U.S.C. 24(Seventh), a national bank
has the power to exercise all such incidental powers as shall be
necessary to carry on the business of banking. An activity is
incidental to the business of banking if it is convenient or useful to
an activity that is part of the business of banking.\44\
---------------------------------------------------------------------------
\44\ Interpretive Letter 1071 (Sept. 6, 2006), 26 OCC Q.J. 46,
2007 WL 5122909 (citing Arnold Tours, Inc. v. Camp, 472 F.2d 427,
431-32 (1st Cir. 1972)).
---------------------------------------------------------------------------
The OCC believes that dealing or investing in industrial or
commercial metal is not incidental to the business of banking. Some
customers may wish to trade industrial or commercial metal with
national banks. However, because few banks buy or sell industrial or
commercial metal in the ordinary course of business, it does not appear
that dealing or investing in industrial or commercial metal
significantly enhances national banks' ability to offer banking
products and services, including those related to precious metals.
Moreover, dealing or investing in industrial or commercial metal does
not appear to enable national banks to use capacity acquired for
banking operations or otherwise avoid economic loss or waste.
Therefore, the OCC concludes national banks may not deal or invest in
industrial or commercial metal under their incidental powers.
C. Transactions in Industrial or Commercial Metal That May Be
Permissible
National banks do have incidental authority to buy and sell
industrial or commercial metal in limited cases. Buying or selling
industrial or commercial metal could be incidental to lending
activities. For example, a mining company could post a copper cathode
as collateral for a loan. Pursuant to the national bank's authority to
acquire property in satisfaction of debt previously contracted, the
bank could seize and then sell the copper to mitigate loan losses if
the borrower defaulted.\45\ National banks also have incidental
authority to buy and sell nominal amounts of industrial or commercial
metal to hedge customer-driven commodity derivatives.\46\ The final
rule does not prohibit these purchases and sales because they are not
dealing or investing.\47\
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\45\ Cf. Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (foreclosure
of a mine); First Nat'l Bank of Parker v. Peavy Elevator Co., 10
S.D. 167, 170 (1897) (foreclosure of grain seed and subsequent
sale).
\46\ Interpretive Letter 684 (Aug. 4, 1995) (permitting physical
delivery of commodities as hedges for customer-driven, non-
speculative transactions), 1995 WL 550219; OCC Bulletin 2015-35,
Quantitative Limits on Physical Commodity Transactions (Aug. 4,
2015) (explaining that ``nominal'' means 5 percent of the bank's
short positions in a particular commodity). The final rule
explicitly provides that national banks may continue to buy and sell
physical metal to hedge a derivative. A similar provision is not
necessary for FSAs because they do not engage in this activity. See
620 Study at 88; OCC Bulletin 2015-35, n. 1.
\47\ Cf. First Nat'l Bank v. Nat'l Exch. Bank, 92 U.S. 122, 128
(1875) (``In the honest exercise of the power to compromise a
doubtful debt owing to a bank, it can hardly be doubted that stocks
may be accepted in payment and satisfaction, with a view to their
subsequent sale or conversion into money so as to make good or
reduce an anticipated loss. Such a transaction would not amount to a
dealing in stocks. It was, in effect, so decided in Fleckner v. Bank
U.S., 8 Wheat. 351 [22 U.S. 338 (1823)], where it was held that a
prohibition against trading and dealing was nothing more than a
prohibition against engaging in the ordinary business of buying and
selling for profit, and did not include purchases resulting from
ordinary banking transactions.'').
Similarly, national banks may buy and sell industrial or
commercial metal as part of their leasing business. 12 U.S.C.
24(Seventh); 12 U.S.C. 24(Tenth); 12 CFR 23.4. A car, for example,
contains metal in a commercial form, but buying a car to lease it is
not dealing or investing in commercial metal. Rather, a lease, like
a reverse repurchase transaction, is a secured loan in a different
form. National banks may also buy and sell industrial or commercial
metals to install pipes and electrical wiring in their physical
premises. 12 U.S.C. 29(First); 12 CFR 7.1000. This activity is
clearly not dealing or investing in industrial or commercial metal.
---------------------------------------------------------------------------
In certain situations, national banks may buy and sell industrial
and commercial metal as reverse repurchase agreements that are the
functional and economic equivalent of secured loans.\48\ In a reverse
repurchase agreement, a bank extends credit by simultaneously buying
collateral from a client and agreeing to sell the collateral back to
the client at a future date. The difference between the sale and
purchase price is effectively the interest the client pays for the
extension of credit. If the reverse repurchase agreement counterparty
defaults, the bank can mitigate its losses by selling the collateral
without first foreclosing on it. Financing customer inventory is a
traditional bank activity; using reverse repurchase agreements rather
than loans to provide the financing is merely a different way of
providing financing.\49\ Financing customer inventory using reverse
repurchase agreements in itself does not indicate dealing or investing
in the metal. However, pledging, selling, or rehypothecating metal
acquired under reverse repurchase agreements could suggest dealing or
investing activity. So, too, could assuming commodity price risk. For
example, an agreement in which the counterparty sells a metal at a
certain price to the bank and then repurchases the metal at a price
that depends on the metal's then-current market price could indicate
dealing or investing activity: The bank is assuming the metal's price
risk and, in some circumstances, could act to benefit from spot market
price appreciation of the metal. On the other hand, setting the
repurchase price at the sale price plus a spread based on the time
value of money is equivalent to a secured loan. The determination of
whether a reverse repurchase agreement that varies from this secured
loan structure is dealing or investing is highly dependent upon the
facts of each transaction. National banks with questions regarding the
permissibility of reverse repurchase agreements that involve
characteristics identified in this discussion should discuss the issue
with the OCC. The
[[Page 96359]]
OCC is willing to entertain requests for such determinations,
consistent with its historical practice of providing interpretive
opinions in cases where there is doubt about the permissibility of
particular activities.
---------------------------------------------------------------------------
\48\ See 12 CFR 211.4(a)(7)
\49\ Under the National Bank Act, credit exposures from
repurchase and reverse repurchase agreements are loans and
extensions of credit subject to a national bank's lending limits. 12
U.S.C. 84(b)(1)(C). We note that Section 610 of the Dodd-Frank Act
expanded the definition of ``loans and extensions of credit'' for
purposes of lending limits to include credit exposure arising from
repurchase agreements and reverse repurchase agreements, among other
transactions. The OCC amended its lending limits regulation, 12 CFR
32, to implement the statutory change made by the Dodd-Frank Act.
---------------------------------------------------------------------------
The final rule does not prohibit national banks from buying and
selling metal through transitory title transfers entered into as part
of a customer-driven financial intermediation business.\50\
Interpretive Letter 1073 \51\ provides that national banks may hedge
metal derivative transactions on a portfolio basis with over-the-
counter derivative transactions that settle in cash or transitory title
transfer. Interpretive Letter 1073 also provides that a national bank
may engage in transitory title transfers in metals for the
accommodation of customers. The OCC concluded in Interpretive Letter
1073 that transitory title transfers involving metals do not entail the
physical possession of commodities.\52\ The OCC's analysis in this
letter noted that transitory title transfers do not involve the
customary activities relating to, or risks attendant to, commodity
ownership, such as storage costs, insurance, and environmental
protection. For these reasons, OCC believes that transitory title
transfers do not constitute physical possession of commodities and
therefore does not consider transitory title transfers to be dealing or
investing in industrial or commercial metal for purposes of the final
rule.\53\ The OCC recognizes that banks may have questions about the
permissibility of specific transitory title transfer transactions. The
fact-specific nature of these issues merits a case-by-case review to
determine the permissibility of the transaction. The OCC will continue
to review requests for interpretive opinions on the permissibility of
individual transactions proposed by a bank. Should the OCC become aware
of additional risks that suggest transitory title transfer activity
presents risks more closely akin to the risks of physical metal
holdings, the OCC may reconsider the treatment of transitory title
transfer transactions.
---------------------------------------------------------------------------
\50\ For purposes of the final rule, the OCC considers a
transitory title transfer to be back-to-back contracts providing for
the receipt and immediate transfer of title to the metal. This means
that a bank holds title to the metal for no more than a legal
instant. See Interpretive Letter 962 (Apr. 21, 2003), 2003 WL
21283155 (``[T]ransitory title transfers preclude actual delivery by
passing title down the chain from the initial seller to the ultimate
buyer in a series of instantaneous back-to-back transactions. Each
party in the chain has title for an instant but does not take actual
physical delivery (other than the ultimate buyer which, in no case,
will be the Bank.'')).
\51\ 26 OCC Q.J. 46, 2007 WL 5122911 (Oct. 19, 2006).
\52\ See also OCC Bulletin 2015-35 (Aug. 4, 2015) (noting that a
physical commodity that a bank acquired and then immediately sold by
transitory title transfer would not be included in the bank's
physical inventory of that commodity).
\53\ In contrast to transitory title transfers, the OCC
considers a commodity held by warehouse receipt for more than a
legal instant to entail physical possession of the commodity. See
OCC Bulletin 2015-35 (``[A] bank that satisfies certain conditions
may engage in physical commodity transactions (for example, by
buying or selling title to a commodity via a warehouse receipt or
bill of lading) to manage the risks of commodity derivatives.'');
Interpretive Letter 684 (Aug. 4, 1995), 1995 WL 550219 (recognizing
physical possession of a commodity by warehouse receipt). The OCC
notes that the customary activities relating to, or risks attendant
to, commodity ownership by warehouse receipt are distinguishable
from those involving transitory title transfer. For example,
Interpretive Letter 684 provides that the OCC expects a bank engaged
in physical commodity hedging, either through warehouse receipt or
``pass-through'' delivery, to adopt and maintain ``safeguards
designed to manage the risks associated with storing, transporting,
and disposing of commodities of which the bank has taken delivery,
including policies and procedures designed to ensure that the bank
has adequate levels of insurance (including insurance for
environmental liabilities) which, after deductions, are commensurate
with the risks assumed.''
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D. Divestiture Period
The final rule prohibits banks from dealing or investing in
industrial or commercial metal. However, in response to a request from
a commenter, the final rule provides a divestiture period for banks
that acquired industrial or commercial metal through dealing or
investing in that metal before the effective date of the rule.\54\
Under the divestiture provision, banks must dispose of such metal as
soon as practicable, but not later than one year from the effective
date of the regulation. The OCC may grant up to four separate one-year
extensions of this divestiture period for a national bank that makes a
good faith effort to dispose of the metal and the bank's retention of
the metal is not inconsistent with its safe and sound operation. The
divestiture provision applies only to existing holdings; national banks
may not acquire additional holdings of industrial and commercial metal
through dealing or investing activities during, or after, the
divestiture period.
---------------------------------------------------------------------------
\54\ The final rule provides a divestiture period for both
national banks and FSAs. The OCC does not expect that a divestiture
period will be necessary for FSAs and most national banks. However,
in order to ensure an orderly liquidation process for all
institutions that hold metal subject to this prohibition, the
divestiture provision is available to both national banks and FSAs.
---------------------------------------------------------------------------
This divestiture period is generally consistent with the OCC's
approach to other nonconforming assets. Banks with questions about the
permissibility of activities or holdings involving industrial or
commercial metal should ask the OCC for a review of the specific
holding or activity.
IV. Regulatory Analysis
Paperwork Reduction Act
Under the Paperwork Reduction Act, 44 U.S.C. 3501-3520, the OCC may
not conduct or sponsor, and a person is not required to respond to, an
information collection unless the information collection displays a
valid Office of Management and Budget (OMB) control number. This final
rule does not introduce any new collections of information, therefore,
it does not require a submission to OMB.
Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
requires an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Analysis describing the impact of the rule on
small entities (defined by the Small Business Administration (SBA) for
purposes of the RFA to include banking entities with total assets of
$550 million or less) or to certify that the rule will not have a
significant economic impact on a substantial number of small entities.
As of December 31, 2015, the OCC supervised 1,032 small
entities.\55\ Although the rule applies to all OCC-supervised small
entities, and thus affects a substantial number of small entities, no
small entities supervised by the OCC currently buy or sell metal in a
physical form primarily suited to commercial or industrial use for the
purpose of dealing or investing in that metal. Thus, the rule will not
have a substantial impact on any OCC-supervised small entities.
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\55\ The OCC calculated the number of small entities using the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $550 million and $38.5 million,
respectively. Consistent with the General Principles of Affiliation,
13 CFR 121.103(a), the OCC counted the assets of affiliated
financial institutions when determining whether to classify a
national bank or FSA as a small entity. The OCC used December 31,
2015, to determine size because a ``financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See
footnote 8 of the SBA's Table of Size Standards.
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Therefore, the OCC certifies that the final rule will not have a
significant economic impact on a substantial number of OCC-supervised
small entities.
Unfunded Mandates Reform Act of 1995 Determination
The OCC analyzed the final rule under the factors set forth in the
Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this
analysis, the
[[Page 96360]]
OCC considered whether the rule includes a federal mandate that may
result in the expenditure by state, local, and Tribal governments, in
the aggregate, or by the private sector, of $100 million or more in any
one year (adjusted annually for inflation).
Although the final rule would apply to all OCC-supervised
institutions, very few of these institutions are currently involved in
activities involving dealing or investing in copper or other metals in
a physical form primarily suited to commercial or industrial use.
While the final rule may prevent OCC-supervised institutions from
realizing potential gains from prohibited investments in physical
metals, the rule also may protect them from realizing potential losses
from investments in physical metals. The OCC is not able to estimate
these potential gains or losses because they will depend on future
fluctuations in the prices of the various physical metals. However, the
OCC does expect OCC-supervised institutions to be able to achieve
comparable returns in alternative non-prohibited investment
opportunities. Thus, the OCC estimates that the opportunity cost of the
final rule will be near zero.
The final rule may impose one-time costs on affected institutions
with respect to the disposal of current physical metal inventory that a
bank may not deal in or invest in under the rule. This cost will depend
to some extent on the amount of physical metal inventory that affected
institutions must dispose of. Given the divestiture period in the final
rule, a gradual sell-off should not affect market prices and the
affected institutions would receive fair value for their metals. Under
these circumstances, the OCC estimates that the disposal costs will
also be minimal.
Finally, by establishing that buying and selling physical metal in
commercial or industrial form is generally not part of the business of
banking, the rule implies that customers of OCC-supervised institutions
will have to identify another reliable source of supply of physical
metals and that OCC-supervised institutions will be less able to
compete with non-bank metals dealers. Given how technology has made the
physical metals markets more accessible, the OCC expects bank customers
will face minimal costs associated with identifying another supplier of
physical metals. The OCC also expects that losing the ability to
compete with non-bank metal dealers will not significantly detract from
the strength of OCC-supervised institutions, especially given that the
final rule would recognize several business-of-banking incidental
exceptions to the prohibition on buying and selling physical metal.
These permissible activities should enable OCC-supervised institutions
to continue to provide metals related services to bank customers that
do not involve dealing or investing in commercial and industrial
metals.
For the reasons described above, the OCC has determined that the
final rule would not result in expenditures by state, local, and Tribal
governments, or by the private sector, of $100 million or more.
Accordingly, the OCC has not prepared a written statement to accompany
the final rule.
List of Subjects in 12 CFR Part 7
Banks, banking, Computer technology, Credit, Federal savings
associations, Insurance, Investments, Metals, National banks, Reporting
and recordkeeping requirements, Securities, Surety bonds.
For the reasons set forth in the preamble, OCC amends 12 CFR part 7
as follows:
PART 7--ACTIVITIES AND OPERATIONS
0
1. The authority citation for part 7 is revised to read as follows:
Authority: 12 U.S.C. 1 et seq., 25b, 71, 71a, 92, 92a, 93, 93a,
371, 371a, 481, 484, 1463, 1464, 1818, and 5412(b)(2)(B).
0
2. Add Sec. 7.1022 to subpart A to read as follows:
Sec. 7.1022 National banks' authority to buy and sell exchange,
coin, and bullion.
(a) In this section, industrial or commercial metal means metal
(including an alloy) in a physical form primarily suited to industrial
or commercial use, for example, copper cathodes.
(b) Scope of authorization. Section 24(Seventh) of the National
Bank Act authorizes national banks to buy and sell exchange, coin, and
bullion. Industrial or commercial metal is not exchange, coin, and
bullion within the meaning of this authorization.
(c) Buying and selling metal as part of or incidental to the
business of banking. Section 24(Seventh) authorizes national banks to
engage in activities that are part of, or incidental to, the business
of banking. Buying and selling industrial or commercial metal for the
purpose of dealing or investing in that metal is not part of or
incidental to the business of banking pursuant to section 24(Seventh).
Accordingly, national banks may not acquire industrial or commercial
metal for purposes of dealing or investing.
(d) Other authorities not affected. This section shall not be
construed to preclude a national bank from acquiring or selling metal
in connection with its incidental authority to foreclose on loan
collateral, compromise doubtful claims, or avoid loss in connection
with a debt previously contracted. This section also shall not be
construed to preclude a national bank from buying and selling physical
metal to hedge a derivative for which that metal is the reference asset
so long as the amount of the physical metal used for hedging purposes
is nominal.
(e) Nonconforming holdings. National banks that hold industrial or
commercial metal as a result of dealing or investing in that metal
shall dispose of such metal as soon as practicable, but not later than
one year from the effective date of this regulation. The OCC may grant
up to four separate one-year extensions to dispose of industrial or
commercial metal if a national bank makes a good faith effort to
dispose of the metal and retention of the metal for an additional year
is not inconsistent with the safe and sound operation of the bank.
0
3. Add Sec. 7.1023 to subpart A to read as follows:
Sec. 7.1023 Federal savings associations, prohibition on industrial
or commercial metal dealing or investing.
(a) In this section, industrial or commercial metal means metal
(including an alloy) in a physical form primarily suited to industrial
or commercial use, for example, copper cathodes.
(b) Federal savings associations may not deal or invest in
industrial or commercial metal.
(c) Other authorities not affected. This section shall not be
construed to preclude a federal savings association from acquiring or
selling metal in connection with its authority to foreclose on loan
collateral, compromise doubtful claims, or avoid loss in connection
with a debt previously contracted.
(d) Nonconforming holdings. Federal savings associations that hold
industrial or commercial metal as a result of dealing or investing in
that metal shall dispose of such metal as soon as practicable, but not
later than one year from the effective date of this regulation. The OCC
may grant up to four separate one-year extensions to dispose of
industrial or commercial metal if a federal savings association makes a
good faith effort to dispose of the metal and retention of the metal
for an additional year is not inconsistent with safe and sound
operation of the association.
[[Page 96361]]
Dated: December 15, 2016.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2016-31572 Filed 12-29-16; 8:45 am]
BILLING CODE 4810-33-P