Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total Loss-Absorbing Capacity Requirements, 708-745 [2020-27046]

Download as PDF 708 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket ID OCC–2018–0019] RIN 1557–AE38 FEDERAL RESERVE SYSTEM 12 CFR Parts 217 and 252 [Regulation Q; Docket No. R–1655] RIN 7100–AF43 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 324 RIN 3064–AE79 Regulatory Capital Treatment for Investments in Certain Unsecured Debt Instruments of Global Systemically Important U.S. Bank Holding Companies, Certain Intermediate Holding Companies, and Global Systemically Important Foreign Banking Organizations; Total LossAbsorbing Capacity Requirements Office of the Comptroller of the Currency, Treasury (OCC); the Board of Governors of the Federal Reserve System (Board); and the Federal Deposit Insurance Corporation (FDIC). ACTION: Final rule. AGENCY: The OCC, Board, and FDIC (collectively, the agencies) are adopting a final rule that applies to advanced approaches banking organizations with the aim of reducing both interconnectedness within the financial system and systemic risks. The final rule requires deduction from a banking organization’s regulatory capital for certain investments in unsecured debt instruments issued by foreign or U.S. global systemically important banking organizations (GSIBs) for the purposes of meeting minimum total lossabsorbing capacity (TLAC) requirements and, where applicable, long-term debt requirements, or for investments in unsecured debt instruments issued by GSIBs that are pari passu or subordinated to such debt instruments. In addition, the Board is adopting changes to its TLAC rules to clarify requirements and correct drafting errors. DATES: The final rule is effective on April 1, 2021. FOR FURTHER INFORMATION CONTACT: OCC: Andrew Tschirhart, Risk Expert (202) 649–6370, Capital and Regulatory jbell on DSKJLSW7X2PROD with RULES2 SUMMARY: VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 Policy; or Carl Kaminski, Special Counsel, or Jean Xiao, Attorney, Chief Counsel’s Office, (202) 649–5490, for persons who are deaf or hearing impaired, TTY, (202) 649–5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. Board: Constance M. Horsley, Deputy Associate Director, (202) 452–5239; Juan Climent, Assistant Director, (202) 872– 7526; Mark Handzlik, Manager, (202) 475–6636; Sean Healey, Lead Financial Institution Policy Analyst, (202) 912– 4611; Division of Supervision and Regulation; or Benjamin McDonough, Assistant General Counsel (202) 452– 2036; or Mark Buresh, Senior Counsel (202) 452–5270, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263– 4869. FDIC: Benedetto Bosco, Chief, Capital Policy Section; bbosco@fdic.gov; Richard Smith, Capital Markets Policy Analyst, rismith@fdic.gov; regulatorycapital@fdic.gov; Capital Markets Branch, Division of Risk Management Supervision, (202) 898– 6888; or Michael Phillips, Counsel, mphillips@fdic.gov; Catherine Wood, Counsel, cawood@fdic.gov; or Ryan Rappa, Counsel, rrappa@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Background A. Capital Requirements B. TLAC Rule III. Overview of the Notice of Proposed Rulemaking and Comments IV. Summary of the Final Rule V. Regulatory Capital Treatment for Advanced Approaches Banking Organizations’ Investments in Covered Debt Instruments A. Scope of Application B. Deduction From Tier 2 Capital C. Amendments to Definitions D. Investments in Covered Banking Organizations’ Own Covered Debt Instruments and Reciprocal Cross Holdings E. Significant and Non-Significant Investments in Covered Debt Instruments F. Corresponding Deduction Approach G. Net Long Position Calculation VI. Technical Amendment and Other Comments VII. Amendments to the Board’s TLAC Rule VIII. Changes to Regulatory Reporting A. Deductions From Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs and Covered IHCs IX. Regulatory Analyses A. Paperwork Reduction Act B. Regulatory Flexibility Act Analysis C. Plain Language D. OCC Unfunded Mandates Reform Act of 1995 Determination E. Riegle Community Development and Regulatory Improvement Act of 1994 F. Congressional Review Act I. Introduction The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and Federal Deposit Insurance Corporation (FDIC) (together, the agencies) are issuing a final rule to revise the regulatory capital rule in a manner substantially consistent with a proposed rule issued in April 2019 (proposal).1 The final rule addresses the regulatory capital treatment of investments by advanced approaches banking organizations in unsecured debt instruments issued by foreign or U.S. global systemically important banking organizations (GSIBs) for the purposes of meeting minimum total lossabsorbing capacity (TLAC) requirements and, as applicable, long-term debt requirements, or of investments in unsecured debt instruments issued by GSIBs that are pari passu or subordinated to such debt instruments (covered debt instruments).2 Consistent with the proposal, the exposures of an advanced approaches banking organization to covered debt instruments generally are subject to deduction from the banking 1 See 84 FR 13814 (April 8, 2019). the proposal was issued, a banking organization was an ‘‘advanced approaches banking organization’’ if it had total assets of at least $250 billion, or if it had consolidated on-balance sheet foreign exposures of at least $10 billion, or if it was a subsidiary of a depository institution, bank holding company, savings and loan holding company or intermediate holding company that was an advanced approaches banking organization. See 78 FR 62018, 62204 (October 11, 2013), 78 FR 55340, 55523 (September 10, 2013). See also 12 CFR part 3 (OCC); 12 CFR part 217 (Board); and 12 CFR part 324 (FDIC). In November 2019, the agencies issued a final rule to revise the criteria for determining the applicability of regulatory capital and liquidity requirements for large U.S. banking organizations and the U.S. intermediate holding companies of certain foreign banking organizations, including the application of the advanced approaches (interagency tailoring final rule). Under this final rule, advanced approaches banking organizations include those banking organizations subject to Category I standards (those banking organizations that qualify as U.S. GSIBs) or Category II standards (banking organizations with (1) at least $700 billion in total consolidated assets or (2) at least $75 billion in cross-jurisdictional activity and more than $100 billion in total consolidated assets), and a subsidiary depository institution of such a banking organization. See 84 FR 59230 (November 1, 2019). 2 When E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations organization’s regulatory capital. The final rule includes certain adjustments to the proposal in response to comments. The final rule aims to reduce both interconnectedness within the financial system and systemic risks. II. Background A. Capital Requirements jbell on DSKJLSW7X2PROD with RULES2 The agencies’ regulatory capital rule (capital rule) imposes minimum capital requirements on banking organizations measured through risk-based and leverage capital ratios.3 These regulatory capital ratios consist of regulatory capital measures relative to riskweighted assets and total assets, respectively.4 The numerators of the regulatory capital ratios include various adjustments and deductions to balancesheet-based regulatory capital components. The capital rule includes two broad categories of deductions from regulatory capital related to investments in the capital instruments of financial institutions by advanced approaches banking organizations.5 First, it requires a banking organization to deduct any investment in its own regulatory capital instruments and any investment in regulatory capital instruments held reciprocally with another financial institution (reciprocal cross holding).6 Second, it requires a banking organization to deduct investments in capital instruments issued by unconsolidated financial institutions that would qualify as regulatory capital if issued by the banking organization 3 Banking organizations subject to the agencies’ capital rule include national banks, state member banks, insured state nonmember banks, savings associations, and top-tier bank holding companies, intermediate holding companies, and savings and loan holding companies domiciled in the United States, but exclude banking organizations subject to the Board’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (12 CFR part 225, appendix C), qualifying community banking organizations that elect to comply with the agencies’ community bank leverage ratio framework, and certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities or that are estate trusts, and bank holding companies and savings and loan holding companies that are employee stock ownership plans. 4 See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12 CFR 324.10(a) (FDIC). In addition to the generally applicable leverage ratio, advanced approaches banking organizations are subject to a supplementary leverage ratio, which measures a banking organization’s tier 1 capital relative to its on-balance sheet and certain off-balance sheet exposures. 5 A different deduction framework applies to nonadvanced approaches banking organizations. See 84 FR 35234 (July 22, 2019). 6 See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board); and 12 CFR 324.22(c)(1) (FDIC). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 itself.7 For the purpose of the latter deduction, a banking organization may be required to deduct the entire amount of the investment, or it may be required to deduct only the portion of the investment that exceeds a certain threshold.8 These deductions are intended to reduce interconnectedness and contagion risk among financial institutions by discouraging banking organizations from investing in the capital of other financial institutions. For deductions related to investments in the capital of unconsolidated financial institutions, a banking organization must deduct from the component of regulatory capital for which the instrument qualifies or would qualify if it were issued by the banking organization that is holding the exposure.9 For example, an advanced approaches banking organization that owns 10 percent or less of the common stock of an unconsolidated financial institution is said to have a ‘‘nonsignificant investment’’ in the capital of the unconsolidated financial institution. If the advanced approaches banking organization invests in tier 2 instruments issued by the unconsolidated financial institution, then it must deduct from its own tier 2 capital the amount, if any, by which the investment, combined with other nonsignificant investments in the capital of other unconsolidated financial institutions, exceeds 10 percent of the sum of the banking organization’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under section __.22(a) through __.22(c)(3), net of associated deferred tax liabilities (DTLs) (10 percent threshold for non-significant investments). Any non-significant investments in the capital of unconsolidated financial institutions that are not deducted from regulatory capital are risk-weighted in accordance with the capital rule.10 B. TLAC Rule In December 2016, the Board issued a final rule to require the largest domestic and foreign banking organizations 7 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). 8 See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC); 12 CFR 217.22(c)(3), (c)(5), and (c)(6) (Board); and 12 CFR 324.22(c)(3), (c)(5), and (c)(6) (FDIC). 9 See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 12 CFR part 217, subparts D, E, and F, as applicable (Board); and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC). 10 See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 12 CFR part 217, subparts D, E, and F, as applicable (Board); and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 709 operating in the United States to maintain a minimum amount of total loss-absorbing capacity (TLAC), consisting of tier 1 capital (excluding minority interest) and certain long-term debt instruments (TLAC rule).11 The TLAC rule applies to a U.S. top-tier bank holding company identified under the Board’s rules as a global systemically important bank holding company (covered BHC) or a top-tier U.S. intermediate holding company subsidiary of a global systemically important foreign banking organization (foreign GSIB) with $50 billion or more in U.S. non-branch assets (covered IHC) (collectively, covered banking organizations). The objective of the TLAC rule is to enhance financial stability by reducing the impact of the failure of covered banking organizations by requiring such organizations to have sufficient lossabsorbing capacity on both a goingconcern and a gone-concern basis. The TLAC rule includes requirements that a covered banking organization maintain outstanding minimum levels of TLAC and long-term debt.12 TLAC is the sum of the tier 1 capital instruments issued directly by the covered banking organization (excluding minority interest) and the long-term debt issued directly by the covered banking organization. Under the TLAC rule, long-term debt is generally unsecured debt that is issued directly by a covered banking organization, has no features that would interfere with an orderly resolution proceeding, has a remaining maturity of at least one year, and is governed by U.S. law, among other provisions.13 Long-term debt instruments under the TLAC rule are capable of absorbing losses in resolution (i.e., on a goneconcern basis). This is because the debt holders’ claim on a banking organization’s assets may not receive full payment in a resolution, receivership, insolvency, or similar proceeding.14 This potential loss11 See 82 FR 8266 (January 24, 2017); 12 CFR part 252, subparts G and P. The TLAC rule’s TLAC and long-term debt requirements took effect on January 1, 2019. 12 See 12 CFR 252.62 and 252.63; 12 CFR 252.162 and 252.165. The requirements applicable under the TLAC rule to covered BHCs and covered IHCs are similar but not identical. 13 Long-term debt issued by a covered IHC to affiliates of the covered IHC is subject to notable additional requirements, including the inclusion of a provision allowing the Board to order the conversion of the debt into common equity tier 1 capital of the covered IHC. See 12 CFR 252.163. 14 The internal debt conversion provision included in covered IHC long-term debt issued to affiliates performs a similar function outside of a resolution proceeding. E:\FR\FM\06JAR2.SGM 06JAR2 710 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations absorbing capacity of long-term debt is part of the rationale for the deduction approach for investments in such debt instruments under this final rule.15 Given the ability of long-term debt to absorb the losses of a covered banking organization in a resolution, receivership, insolvency, or similar proceeding, the Board proposed regulatory capital deductions for investments by Board-regulated banking organizations in long-term debt issued under the TLAC rule when it initially proposed the TLAC rule in 2015.16 The Board did not finalize these limitations when it issued the final TLAC rule because it needed additional time to work with the OCC and the FDIC to develop a proposed interagency approach regarding the regulatory capital treatment for investments in certain debt instruments issued by covered banking organizations. jbell on DSKJLSW7X2PROD with RULES2 III. Overview of Notice of Proposed Rulemaking and Comments In April 2019, the agencies issued a proposal to address, for purposes of the capital rule, the systemic risks posed by an advanced approaches banking organization’s investments in covered debt instruments and to create an incentive for advanced approaches banking organizations to limit their exposure to GSIBs. The deductions required under the proposal would have affected the capital ratios of advanced approaches banking organizations. Without the proposed changes, investments in covered debt instruments issued by covered BHCs, foreign GSIBs, and covered IHCs are generally not subject to deduction and would generally be subject to a risk weight of 100 percent. An investment in a covered debt instrument, as defined in the proposal, by an advanced approaches banking organization would have been treated as an investment in a tier 2 capital instrument for purposes of the existing deduction framework. As a result, an investment in a covered debt instrument would have been subject to deduction from the advanced approaches banking organization’s own tier 2 capital. The existing corresponding deduction approach in the capital rule would have been amended to apply any required 15 Long-term debt under the TLAC rule may also qualify as tier 2 capital under the capital rule, if it satisfies the eligibility criteria for tier 2 capital. 16 The proposal of the TLAC rule in 2015 was issued solely by the Board. Therefore, the proposed regulatory capital deductions in that proposal would have only applied to Board-regulated banking organizations, which include bank holding companies, intermediate holding companies, savings and loan holdings companies, and state member banks. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 deduction by advanced approaches banking organizations of an investment in a covered debt instrument that exceeded certain thresholds, consistent with the deduction framework for investments in the capital of unconsolidated financial institutions. In addition, the existing deduction approaches under the capital rule would have been amended to apply to an advanced approaches banking organization’s reciprocal cross holdings of covered debt instruments; that is, an advanced approaches banking organization would have deducted from its own tier 2 capital any reciprocal cross holdings of covered debt instruments with another banking organization. The existing deduction approaches under the capital rule would have also been amended to apply to a covered BHC’s investments in its own covered debt instruments. Similarly, the existing deduction approaches under the capital rule would have also been amended to apply to a covered IHC subject to the advanced approaches (advanced approaches covered IHC) and its investments in its own covered debt instruments. The proposal also included certain exclusions from deduction. Importantly, the proposal would have allowed advanced approaches banking organizations to exclude from deduction investments in covered debt instruments, subject to certain qualifying and measurement criteria, that are five percent or less of the sum of advanced approaches banking organization’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under section __.22(a) through __.22(c)(3), net of associated DTLs (five percent exclusion). As discussed in the preamble to the proposal, the agencies designed the exclusion from deduction to support deep and liquid markets for covered debt instruments issued by GSIBs. In the case of a U.S. GSIB, it would have applied the proposed exclusion only to ‘‘excluded covered debt instruments,’’ which were defined in the proposal as covered debt instruments held for 30 business days or less and held for the purpose of shortterm resale or with the intent of benefiting from actual or expected shortterm price movements, or to lock in arbitrage profits. This provision was intended to limit the five percent exclusion for U.S. GSIBs to covered debt instruments held in connection with market making activities. Advanced approaches banking organizations that are not U.S. GSIBs would not have been PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 subject to this limit on the use of the five percent exclusion. Under the proposal’s five percent exclusion, all advanced approaches banking organizations could exclude covered debt instruments measured on a gross long basis from the deduction framework up to a cap of five percent of the banking organization’s common equity tier 1 capital. The proposal would have revised section __.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments, and added several new definitions to section __.2 to effectuate these deductions. Further, the definition of ‘‘investment in the capital of an unconsolidated financial institution’’ would have been amended to correct a typographical error. Collectively, the agencies received ten public comment letters from trade associations, public interest groups, private individuals, and other interested parties. As further detailed below, commenters generally supported the overarching goal of the proposal to reduce interconnectedness by creating an incentive for advanced approaches banking organizations to limit their exposure to GSIBs. However, commenters also expressed certain general concerns with the proposal and noted specific concerns with certain technical aspects of it. The agencies are jointly finalizing a regulatory capital treatment for investments in covered debt instruments that applies to advanced approaches banking organizations. The final rule is substantially consistent with the proposal, with certain modifications in response to comments as well as some technical clarifications. IV. Summary of the Final Rule The final rule applies to advanced approaches banking organizations and generally requires deductions from capital for direct, indirect, and synthetic exposures to covered debt instruments and any other unsecured debt instruments pari passu or subordinated to covered debt instruments.17 Under the final rule, an advanced approaches banking organization treats investments in covered debt instruments as investments in tier 2 capital instruments for purposes of applying the corresponding deduction approach in 17 As discussed further in section V.C.2 below, the final rule excludes certain unsecured debt instruments issued by foreign GSIBs from the scope of the final rule. Specifically, the final rule generally excludes from the definition of covered debt instrument an unsecured debt instrument that cannot be written down or converted into equity (i.e., bailed in) under a special resolution regime. E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations the capital rule. Deduction from capital is required for: • Investments in a covered BHC’s or advanced approaches covered IHC’s own covered debt instruments, as applicable; • Reciprocal cross holdings with another financial institution of covered debt instruments; • Investments in covered debt instruments of a financial institution while also holding 10 percent or more of the financial institution’s common stock; and • Investments in covered debt instruments that, together with investments in the capital of unconsolidated financial institutions, exceed 10 percent of the investing advanced approaches banking organization’s common equity tier 1 capital. • Under the final rule, an advanced approaches banking organization may exclude from deduction investments in certain covered debt instruments up to five percent of its common equity tier 1 capital, as measured on a gross long basis.18 Usage of the five percent exclusion is tailored, depending on whether the advanced approaches banking organization is a U.S. GSIB. For U.S. GSIBs, only ‘‘excluded covered debt instruments’’ are eligible for the five percent exclusion in the final rule. Generally, ‘‘excluded covered debt instruments’’ in the final rule are investments in covered debt instruments that are held in accordance with market making activities, as identified using criteria from the regulations implementing section 13 of the Bank Holding Company Act (commonly known as the Volcker Rule) as discussed in more detail in section V.E. below. A U.S. GSIB’s direct or indirect exposure to a covered debt instrument is an excluded covered debt instrument if the exposure is held for 30 or fewer business days and held in connection with market making-related activities. A U.S. GSIB’s holding of a synthetic exposure to a covered debt instrument is not limited to 30 business days in order to qualify as an excluded covered debt instrument. For advanced approaches banking organizations that are not U.S. GSIBs, any direct, indirect, or synthetic exposure to a covered debt instrument issued by an unconsolidated financial institution that is a non-significant investment is eligible for the five percent exclusion in the final rule. The final rule revises section __.22(c), (f), and (h) of the capital rule to incorporate the deduction approach for investments in covered debt instruments. As with the proposal, several new definitions are added to section __.2 in the final rule to effectuate these deductions. More information on these specific revisions to the capital rule are provided below. V. Regulatory Capital Treatment for Advanced Approaches Banking Organizations’ Investments in Covered Debt Instruments A. Scope of Application The proposal would have applied the deduction framework for covered debt instruments to advanced approaches banking organizations. Since the proposal was issued, the agencies issued the interagency tailoring final rule that included revisions to the scope of advanced approaches banking organizations.19 As a result of the interagency tailoring final rule, ‘‘advanced approaches banking organizations’’ include those banking organizations subject to Category I standards (i.e., those banking organizations that qualify as U.S. GSIBs), Category II standards (i.e., banking organizations with (1) at least $700 billion in total consolidated assets or (2) at least $75 billion in crossjurisdictional activity and at least $100 billion in total consolidated assets), or a subsidiary depository institution of a banking organization subject to Category I or II standards. Some commenters suggested that the agencies should apply the proposal to all banking organizations subject to the capital rule. Other commenters suggested the agencies apply the proposal to all banking organizations subject to Category I through IV standards, as defined in the interagency tailoring final rule.20 After considering the comments, the agencies are continuing to limit the scope of this rule to advanced approaches banking organizations, as revised by the interagency tailoring final rule. As explained in the proposal, the systemic risks associated with banking organizations’ investments in covered debt instruments is greatest for the banking organizations covered by the proposal. However, the agencies acknowledge the possibility of potential systemic risks associated with other banking organizations’ investments in covered debt instruments and will continue to evaluate whether additional steps are warranted to address such risks. 19 See 18 See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.22(h)(2) (Board); 12 CFR 324.2(h)(2) (FDIC). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 84 FR 59230 (November 1, 2019). 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). 20 See PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 711 B. Deduction From Tier 2 Capital Under the agencies’ capital rule, a banking organization must deduct from regulatory capital any investments in its own capital instruments and in the capital of other financial institutions that it holds reciprocally. Other investments in the capital of unconsolidated financial institutions are subject to deduction to the extent they exceed certain thresholds. Under the proposal, an investment in a covered debt instrument by an advanced approaches banking organization would have been treated as an investment in a tier 2 capital instrument for purposes of the deduction framework, and therefore, would have been subject to deduction from the advanced approaches banking organization’s own tier 2 capital. The existing corresponding deduction approach in the capital rule would have been amended to apply to any deduction by advanced approaches banking organizations of an investment in a covered debt instrument that exceeded certain thresholds, as if the covered debt instrument were a tier 2 capital instrument. In addition, the existing deduction approaches under the capital rule would have been amended to apply to a covered BHC’s or advanced approaches covered IHC’s investments in its own covered debt instruments, and to advanced approaches banking organizations’ reciprocal cross holdings of covered debt instruments with other financial institutions. Such investments and cross holdings would be deducted from an advanced approaches banking organization’s own tier 2 capital, as applicable. Some commenters expressed concerns that deducting a covered debt instrument from an advanced approaches banking organization’s own tier 2 capital is insufficiently restrictive. As an alternative, these commenters recommended that advanced approaches banking organizations deduct investments in covered debt instruments from their own common equity tier 1 capital. Some commenters suggested that the prohibition of all holdings of covered debt instruments by advanced approaches banking organizations would be more appropriate. Other commenters expressed concerns that deducting a covered debt instrument from an advanced approaches banking organization’s own tier 2 capital is overly restrictive. These commenters asserted that a covered BHC or advanced approaches covered IHC should be able to effectuate deductions E:\FR\FM\06JAR2.SGM 06JAR2 712 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations from its own TLAC-eligible long-term debt rather than its own tier 2 capital. Requiring deduction of a covered debt instrument from tier 2 capital should be a sufficiently prudent and simple approach that discourages advanced approaches banking organizations’ investments in such instruments and thereby supports the objectives of reducing both interconnectedness within the financial system and systemic risks. Effectuating deductions from a covered BHC’s or advanced approaches covered IHC’s own TLACeligible debt, rather than own tier 2 capital, could disproportionately favor the largest and most internationally active banking organizations. A less complex banking organization, such as a non-GSIB advanced approaches banking organization, would make all deductions related to an investment in a covered debt instrument from its own tier 2 capital, since non-GSIBs are not required to issue TLAC-eligible debt. Further, allowing covered BHCs and advanced approaches covered IHCs to deduct from their own TLAC-eligible debt creates additional balance sheet capacity for these banking organizations to invest in covered debt instruments issued by other GSIBs relative to nonGSIB advanced approaches banking organizations, thereby undermining a goal of the final rule to reduce interconnectedness among large and internationally active banking organizations. The disproportionate effects of allowing deduction from own TLAC-eligible debt would be further exacerbated if the agencies were to expand the scope of the final rule in the future as described above. As such, the agencies are finalizing, as proposed, the requirement that an advanced approaches banking organization treat an investment in a covered debt instrument as an investment in a tier 2 capital instrument, and therefore, deduct such investment from its own tier 2 capital. C. Amendments to Definitions The proposal would have added or amended certain definitions in section _ _.2 of the capital rule to implement the proposed deduction approach. jbell on DSKJLSW7X2PROD with RULES2 1. Definition of ‘‘Covered Debt Instrument’’ for Covered BHC and Covered IHC Issuance Under the proposal, a ‘‘covered debt instrument’’ would have been defined to include an unsecured debt instrument that is: (1) Issued by a covered BHC and that is an ‘‘eligible debt security’’ for VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 purposes of the TLAC rule,21 or that is pari passu or subordinated to any ‘‘eligible debt security’’ issued by the covered BHC; or (2) Issued by a covered IHC and that is an ‘‘eligible Covered IHC debt security’’ for purposes of the TLAC rule,22 or that is pari passu or subordinated to any ‘‘eligible Covered IHC debt security’’ issued by the covered IHC. Under the proposal, a covered debt instrument would not have included a debt instrument that qualifies as tier 2 capital under the capital rule. Some commenters requested that pari passu or subordinated unsecured debt instruments be excluded from the definition of ‘‘covered debt instrument.’’ Commenters argued that it is not practical to determine whether a given instrument is pari passu or subordinated to TLAC-eligible debt issued by a covered BHC or covered IHC and whether a given debt instrument was an eligible long-term debt instrument under the TLAC rule. Further, commenters argued that because the TLAC rule limits the amount of debt that a covered BHC or covered IHC can issue that is not TLACeligible but is pari passu with or subordinated to TLAC-eligible debt, significant amounts of such debt should not be outstanding. Treating unsecured debt instruments that are pari passu or subordinated to TLAC-eligible debt instruments as ‘‘covered debt instruments’’ is important, given that these liabilities will incur losses ahead of or proportionally with TLAC-eligible debt. Excluding these pari passu and subordinated instruments from the regulatory deduction treatment would understate the degree of risk of these investments. Advanced approaches banking organizations should be able to determine whether an instrument qualifies as TLAC under applicable standards, or whether an instrument is pari passu or subordinated to a company’s TLAC-eligible debt instruments based on public information and routine due diligence. Accordingly, the agencies are finalizing as proposed the above prongs of the definition of covered debt instrument for covered BHC and covered IHC debt issuances. 2. Definition of ‘‘Covered Debt Instrument’’ for Foreign GSIB Issuance A ‘‘covered debt instrument’’ also would have included any unsecured debt instrument issued by a foreign 21 See 22 See PO 00000 12 CFR 252.61. 12 CFR 252.161. Frm 00006 Fmt 4701 Sfmt 4700 GSIB or any of its subsidiaries, other than its covered IHC, for the purpose of absorbing losses or recapitalizing the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries (foreign TLAC-eligible debt). Further, covered debt instruments would have also included any debt instrument that is pari passu or subordinated to any foreign TLACeligible debt, other than an unsecured debt instrument that is included in the regulatory capital of the issuer. Commenters suggested that the scope of the definition of ‘‘covered debt instrument’’ should be revised to include only foreign TLAC-eligible debt as determined under applicable homecountry standards.23 Commenters stated that the proposed scope of the definition is broader than necessary because the issuance of such liabilities is subject to the Financial Stability Board (FSB)’s TLAC term sheet’s limitation on issuance of excluded liabilities.24 Some commenters suggested that liabilities issued by foreign GSIBs that are ‘‘excluded liabilities’’ under the FSB’s TLAC term sheet should be excluded from the proposal’s definition of covered debt instrument and therefore exempted from the deduction framework.25 23 The Basel Committee’s TLAC Holdings standard excludes from the definition of ‘‘other TLAC liabilities’’ instruments that are pari passu to (1) excluded liabilities and (2) other instruments that are eligible for recognition as external TLAC by virtue of the exemptions to the subordination requirements in the Financial Stability Board’s TLAC term sheet. See section 66.c of the TLAC Holdings standard. Only a proportion of instruments that are eligible to be recognized as external TLAC by virtue of the subordination exemptions may be considered TLAC under the TLAC Holdings standard. The proportion equals the ratio of (1) the debt instruments issued by a GSIB that rank pari passu to excluded liabilities and that are recognized as external TLAC by the GSIB, to (2) the debt instruments issued by the GSIB that rank pari passu to excluded liabilities and that would be recognized as external TLAC if the subordination requirement was not applied. As stated in the proposal, the agencies believe that implementation of the proportional deduction approach used in the Basel Committee’s TLAC Holdings standard would have introduced too much complexity and operational burden to the capital rule; the final rule does not implement the proportional deduction approach. See Basel Committee for Banking Supervision and Regulation, ‘‘TLAC Holdings’’ (October 12, 2016), available at https://www.bis.org/ bcbs/publ/d387.pdf. (TLAC Holdings standard). 24 See Financial Stability Board, ‘‘Principles on Loss-absorbing and Recapitalisation Capacity of G– SIBs in Resolution—Total Loss-absorbing Capacity (TLAC) Term Sheet,’’ (November 9, 2015), available at https://www.fsb.org/wp-content/uploads/TLACPrinciples-and-Term-Sheet-for-publicationfinal.pdf. 25 Under the FSB’s TLAC term sheet, ‘‘excluded liabilities’’ do not qualify as TLAC and therefore are not subject to deduction under the TLAC Holdings E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 Some commenters reiterated that it is not practical for banking organizations to determine whether a given instrument is pari passu or subordinated to foreign TLAC-eligible debt as such a determination requires complex analyses of foreign law with respect to insolvency regimes and creditor hierarchies. Commenters also asserted that there could be unintended consequences of including instruments that are pari passu or subordinated to foreign TLAC-eligible debt, including interference with ordinary interbank transactions. As a result, banking organizations would make conservative assumptions and treat all unsecured debt instruments issued by foreign GSIBs as subject to the deduction framework. Therefore, commenters suggested that the final rule should not include instruments pari passu or subordinated to foreign TLAC-eligible debt in the definition of ‘‘covered debt instruments.’’ For the same reasons discussed above with respect to instruments issued by covered BHCs and covered IHCs, the final rule defines debt instruments that are pari passu or subordinated to foreign TLAC-eligible debt as ‘‘covered debt instruments.’’ As discussed, such instruments would incur losses ahead of or proportionally with foreign TLACeligible debt and therefore should be subject to the deduction framework. However, the agencies recognize the commenters’ concerns and revise in two ways the definition of covered debt instruments issued by foreign GSIBs and their subsidiaries, other than covered IHCs. First, the final rule provides that an instrument is a covered debt instrument if it is ‘‘eligible for use to comply with an applicable law or regulation’’ requiring the issuance of a minimum amount of instruments to absorb losses or to recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding. The proposal’s definition would not have explicitly considered whether the instrument is eligible for use to comply with such a law or regulation. Second, the final rule revises the definition of a covered debt instrument to exclude certain unsecured debt instruments from the scope of the standard, even if they rank pari passu or subordinated to a TLAC instrument. Excluded liabilities include deposits, liabilities arising from derivatives, and structured notes, among other items. The TLAC rule prohibits or limits covered banking organizations from entering into financial arrangements that may compromise an orderly resolution process, including limiting the amount of liabilities to unaffiliated companies. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 definition. If the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and foreign TLAC-eligible debt is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to foreign TLAC-eligible debt if that instrument is eligible to be written down or converted into equity or another capital instrument under that special resolution regime ahead of or proportionally with any foreign TLAC-eligible debt. These revisions reflect the FSB’s TLAC term sheet’s focus on having instruments and liabilities that should be readily available for bail-in, and that instruments that cannot be bailed in effectively rank senior to foreign TLACeligible debt in bail-in.26 These revisions should reduce the burden associated with determining whether unsecured debt instruments are pari passu or subordinated to foreign TLAC-eligible debt. For purposes of the final rule, an advanced approaches banking organization can rely on the terms of any special resolution regime and other applicable laws or regulations for purposes of determining the applicability of the final rule’s deduction framework for an unsecured debt instrument. For example, if the applicable law or regulation specifies the seniority of instruments that must be issued, the advanced approaches banking organization can rely on that specification of seniority in determining whether a different instrument is pari passu or subordinated to TLAC-eligible debt instruments. These revisions also address concerns raised by commenters that the proposal could have interfered with ordinary interbank transactions. For example, if the special resolution regime applicable to a foreign GSIB provides that deposits 26 Generally, a resolution regime that is consistent with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions would be a special resolution regime that addresses the failure or potential failure of a financial company. See Financial Stability Board, ‘‘Key Attributes of Effective Resolution Regimes for Financial Institutions,’’ (October 15, 2014), https:// www.fsb.org/wp-content/uploads/r_141015.pdf. Current examples of special resolution regimes that address the failure or potential failure of a financial company are those included in the International Swaps and Derivatives Association (ISDA) 2015 Universal Resolution Stay Protocol and the ISDA 2018 U.S. Resolution Stay Protocol. See ISDA 2015 Universal Resolution Stay Protocol (November 4, 2015), https://assets.isda.org/media/ac6b533f-3/ 5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay Protocol (July 31, 2018), https://www.isda.org/a/ CIjEE/3431552_40ISDA-2018-U.S.-ProtocolFinal.pdf. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 713 are excluded from bail-in, those deposits are not covered debt instruments subject to the final rule’s deduction framework. 3. Other Definitions Similar to the measurement of investments in the capital of unconsolidated financial institutions, an ‘‘investment in a covered debt instrument’’ would have been defined in the proposal as a net long position in a covered debt instrument, including direct, indirect, and synthetic exposures to such covered debt instruments. Investments in covered debt instruments would have excluded underwriting positions held for five business days or less. In addition, the proposal would have amended the definitions of ‘‘indirect exposure’’ and ‘‘synthetic exposure’’ in the capital rule to add exposures to covered debt instruments.27 The agencies received no comments on these technical elements of the proposal, and are finalizing, as proposed, the definitions for ‘‘investment in a covered debt instrument,’’ ‘‘indirect exposure,’’ and ‘‘synthetic exposure.’’ D. Investments in Covered Banking Organizations’ Own Covered Debt Instruments and Reciprocal Cross Holdings Under the agencies’ capital rule, a banking organization must deduct from regulatory capital an investment in its own capital instruments and investments in the capital of other financial institutions that it holds reciprocally under sections __.22(c)(1) and (3), respectively. The proposal would have amended section 217.22(c)(1) to require a covered BHC or a covered IHC to deduct from tier 2 capital its investments in its own covered debt instruments. The proposal also would have amended section __ .22(c)(3) to require advanced approaches banking organizations to deduct from tier 2 capital any investment in a covered debt instrument that is held reciprocally with another financial institution. As described earlier, some commenters expressed concerns that deducting a covered debt instrument from an advanced approaches banking organization’s own tier 2 capital is overly restrictive, including in cases of deductions for investments in its own covered debt instruments, as applicable, 27 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 324.2 (FDIC) (‘‘investment in the capital of an unconsolidated financial institution,’’ ‘‘investment in the banking organization’s own capital instrument,’’ ‘‘indirect exposure,’’ and ‘‘synthetic exposure’’). E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 714 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations and reciprocal cross holdings with other financial institutions. These commenters asserted that a covered BHC or a covered IHC should be able to effectuate deductions from its own TLAC-eligible long-term debt rather than its own tier 2 capital for these investments. Requiring a deduction of a covered debt instrument from tier 2 capital for deductions related to investments in an advanced approaches banking organization’s own covered debt instruments and reciprocal cross holdings should be a sufficiently prudent and simple approach that discourages advanced approaches banking organizations’ investments in such instruments, as applicable, and thereby supports the objectives of reducing both interconnectedness within the financial system and systemic risks. As mentioned earlier, effectuating deductions from a covered BHC’s or a covered IHC’s own TLACeligible debt, rather than its own tier 2 capital, could disproportionately favor the largest and most internationally active banking organizations. As such, the agencies are finalizing, as proposed, that an advanced approaches banking organization will generally deduct investments in own covered debt instruments, as applicable, and reciprocal cross holdings with other financial institutions in covered debt instruments from its own tier 2 capital. Commenters asked that the final rule include a separate deduction threshold for market making activities in an advanced approaches banking organization’s own covered debt instruments capped at five percent of a covered BHC’s or advanced approaches covered IHC’s own common equity tier 1 capital. Commenters stated that such a threshold is necessary to better facilitate deep and liquid markets for TLAC-eligible debt instruments. Further, commenters claimed that GSIBs are often the biggest market makers in their own covered debt instruments and, under the U.S. GAAP accounting standard, their own holdings of covered debt instruments are not always eliminated in full in consolidation. In cases where a GSIB’s investments in its own covered debt instruments are not fully extinguished, the exposure amount can be greater than zero and therefore subject to deduction from tier 2 capital under the proposal. Commenters stated that a separate five percent threshold for market making in an advanced approaches banking organization’s own covered debt instruments in the final rule would prevent a capital deduction for such investments. However, finalizing the VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 rule with a separate threshold for investments in an advanced approaches banking organization’s own covered debt instruments could create additional balance sheet capacity for covered BHCs and advanced approaches covered IHCs to increase their investments in covered debt instruments issued by other GSIBs. Such an approach would not align with the proposal’s goal of reducing interconnectedness and systemic risks among large and internationally active banking organizations. Therefore, the final rule does not implement this suggested change. E. Significant and Non-Significant Investments in Covered Debt Instruments Under sections __.22(c)(5) and (6) of the capital rule, an advanced approaches banking organization must deduct from regulatory capital certain investments in the capital of unconsolidated financial institutions. The calculation of the deduction depends on whether the banking organization has a ‘‘significant’’ or a ‘‘non-significant’’ investment, with ‘‘significant’’ defined as ownership of more than 10 percent of the common stock of the unconsolidated financial institution and ‘‘non-significant’’ defined as ownership of 10 percent or less of the common stock of the unconsolidated financial institution.28 When a banking organization has a ‘‘significant investment’’ in an unconsolidated financial institution, the banking organization must deduct from regulatory capital any investment in the capital of the unconsolidated financial institution that is not in the form of common stock as measured on a net long basis, and the banking organization must also deduct from regulatory capital any investment in the capital of the unconsolidated financial institution in the form of common stock that exceeds 10 percent of the advanced approaches banking organization’s own common equity tier 1 capital as measured on a net long basis.29 If an advanced 28 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) (‘‘significant investment in the capital of an unconsolidated financial institution’’ and ‘‘non-significant investment in the capital of an unconsolidated financial institution’’). 29 See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12 CFR 217.22(c)(6) and (d)(2)(i)(C) (Board); and 12 CFR 324.22(c)(6) and (d)(2)(i)(C) (FDIC). In addition to the 10 percent threshold, a banking organization could be subject to additional deductions for significant investments in financial institutions in the form of common stock, if the amount not deducted under the 10 percent limit, combined with mortgage servicing assets and deferred tax assets that are not deducted, exceed 15 percent of the banking organization’s common equity tier 1 capital. See 12 CFR 3.22(d) (OCC); 12 CFR 217.22(d) (Board); and 12 CFR 324.22(d) (FDIC). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 approaches banking organization has one or more ‘‘non-significant investments’’ in unconsolidated financial institutions, it must aggregate such investments and deduct from regulatory capital any amount that exceeds the 10 percent threshold for non-significant investments, as measured on a net long basis.30 The proposal would have amended the capital rule to require an advanced approaches banking organization with an investment in a covered debt instrument issued by an unconsolidated financial institution to deduct the investment from tier 2 capital if the advanced approaches banking organization has a significant investment in the capital of the unconsolidated financial institution. The agencies received no comments on deductions for significant investments in the capital of an unconsolidated financial institution and are finalizing this aspect of the rule as proposed. The proposal would have amended the capital rule to require an advanced approaches banking organization with an investment in a covered debt instrument in a financial institution in which the advanced approaches banking organization does not also have a significant investment in the form of common stock to include such investment in the covered debt instrument in the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions. As under the existing capital rule, the proposal would have required an advanced approaches banking organization to deduct from regulatory capital the amount by which the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions and such covered debt instruments exceeds the 10 percent threshold for non-significant investments. Any investment in a covered debt instrument subject to deduction would have been deducted according to the corresponding deduction approach described below in section V.F. Any investment in a covered debt instrument not subject to deduction would have been included in risk-weighted assets, generally with a 100 percent risk weight. Some commenters suggested that the agencies recalibrate the 10 percent threshold for non-significant investments in consideration of the expanded scope of instruments that would be included within that threshold under the proposal. For 30 See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); and 12 CFR 324.2(c)(5) (FDIC). E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations example, some commenters asked the agencies to expand the non-significant investments threshold to 10 percent of an advanced approaches banking organization’s own total capital from 10 percent of its own common equity tier 1 capital. Changing the non-significant investments threshold in the manner the commenters suggested could undermine a main goal of the proposal—to reduce interconnectedness among large and internationally active banking organizations. Accordingly, the final rule requires an advanced approaches banking organization with an investment in a covered debt instrument in a financial institution in which the advanced approaches banking organization does not have a significant investment to include such investment in the aggregate amount of nonsignificant investments in the capital of unconsolidated financial institutions, as proposed. Further, the final rule requires an advanced approaches banking organization to deduct from regulatory capital the amount by which the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions exceeds the 10 percent threshold for non-significant investments, as proposed. The proposal would have included limited exclusions from the 10 percent threshold for non-significant investments’ deduction approach. The exclusions would have depended on whether an advanced approaches banking organization is a U.S. GSIB or a subsidiary of a U.S. GSIB (U.S. GSIB banking organization). To help support a deep and liquid market for covered debt instruments, the proposal would have permitted U.S. GSIB banking organizations to exclude limited amounts of market making exposures (‘‘excluded covered debt instruments’’) from the 10 percent threshold for nonsignificant investments deduction. For example, a U.S. GSIB could have excluded covered debt instruments from the aggregate amount of non-significant investments in the capital of unconsolidated financial institutions. The aggregate amount of the exclusion, measured on a gross long basis, was limited to five percent of the GSIB’s own common equity tier 1 capital (market making exclusion). If the aggregate amount of excluded covered debt instruments were more than five percent of the common equity tier 1 capital, then the excess over five percent would have been subject to deduction from tier 2 capital on a gross long basis. In addition, if an excluded covered debt instrument were held for more than 30 VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 business days or ceased to be held in connection with market making activities, then the excluded covered debt instrument would have been subject to deduction from tier 2 capital on a gross long basis. Finally, in order to dissuade regulatory arbitrage, the proposal would not have allowed U.S. GSIB banking organizations to subsequently move ‘‘excluded covered debt instruments’’ from the market making exclusion to the 10 percent threshold for non-significant investments. Commenters stressed the importance of derivatives to market making activities in securities, particularly covered debt instruments issued by GSIBs. In market making transactions, U.S. GSIBs will often act as financial intermediaries between clients, transferring risks related to covered debt instruments. This risk transfer is often conducted through offsetting derivative transactions or directly buying and selling covered debt instruments. Commenters stated that this market making activity supports deep and liquid markets for covered debt instruments by allowing investors to reduce (or gain) exposure to covered debt instruments without actually selling (or buying) the securities. Derivatives are essential to such activities because they allow market makers to establish and hedge these exposures. As such, these commenters asserted that the agencies should eliminate the proposed 30-business-day requirement because it would make the proposed market making exclusion unavailable for many market making activities that support the depth and liquidity of the markets for TLAC-eligible debt, in particular synthetic exposures from derivatives used in market making activities. These commenters noted that bona fide market making activities, including derivative- and hedgingrelated activities, often involve holding exposures for longer than 30 business days. Commenters further indicated that the 30-business-day requirement would also create incentives for U.S. GSIB banking organizations to arbitrage the final rule by exiting and reestablishing hedge positions to avoid a mandatory deduction from tier 2 capital if the position is held for more than 30 business days. Commenters indicated that re-establishing hedge positions would result in costs to banking organizations and clients without reducing the risks associated with the transactions. Additionally, these commenters indicated that the vast majority of market making activity in covered debt instruments is in the form PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 715 of derivative exposures. Therefore, retaining the 30-business-day requirement would arguably make the five percent exclusion inoperable for most market making activities in covered debt instruments. As an alternative to the proposed market making standard and the proposed 30business-day requirement, commenters suggested the agencies use the regulatory framework implementing the Volcker Rule to identify which positions in covered debt instruments are held for market making purposes and eliminate the 30-business-day requirement. These commenters stated that this approach would promote effectiveness, simplicity, and efficiency in the regulation. After considering commenters’ suggestions to eliminate the proposed 30-business-day requirement for market making in covered debt instruments, the agencies have revised the proposal by removing the 30-business-day requirement for market making in the form of ‘‘synthetic exposures’’ as defined in the agencies’ capital rule.31 Synthetic market making exposures, such as derivatives, may frequently be held for more than 30 business days. Removing the 30-business-day requirement for synthetic exposures would, relative to the proposal, better align with the proposal’s goal of supporting deep and liquid markets for covered debt instruments by allowing synthetic exposures arising from market making activities to be included in the market making exclusion, subject to limits. As discussed, this exclusion is limited to five percent of common equity tier 1 capital, measured on a gross long basis. These limits are consistent with financial stability goals of avoiding asset fire sales in times of stress, encouraging risk-mitigating hedges, and reducing interconnectedness while still supporting deep and liquid markets for TLAC-eligible debt instruments. Accordingly, the final rule reflects this change. However, the agencies continue to believe that the 30-business-day requirement is an appropriate metric to identify market making positions in ‘‘direct’’ investments in covered debt instruments (i.e., holding the instrument on the banking organization’s balance sheet) and ‘‘indirect’’ investments in covered debt instruments (i.e., exposure to the instrument through investment funds).32 Direct investments in covered 31 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) (‘‘synthetic exposure’’). 32 See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC) (‘‘investment in the capital of E:\FR\FM\06JAR2.SGM Continued 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 716 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations debt instruments held in connection with market making should turn over regularly and the agencies seek to disincentivize long-term direct and indirect exposures to covered debt instruments, given the risk of write-down or conversion to equity of such instruments. Therefore, the final rule retains the 30-business-day requirement for ‘‘direct’’ and ‘‘indirect’’ investments in excluded covered debt instruments, but not for ‘‘synthetic’’ investments in excluded covered debt instruments. This change from the proposal should balance the goals of limiting interconnectedness among the largest and most internationally active banking organizations and promoting the liquidity of TLAC-eligible debt instruments. Additionally, the agencies clarify that there is no requirement under the final rule to assign investments in covered debt instruments held in connection with market making as ‘‘excluded covered debt instruments.’’ To the extent a U.S. GSIB banking organization has available capacity, all investments in covered debt instruments could be held on a net long basis as non-significant investments in the capital of an unconsolidated financial institution subject to the 10 percent threshold for non-significant investments. After consideration of comments, the agencies also have revised the rule to use the Volcker Rule exemption for market making activities to identify covered debt instruments held for market making for purposes of qualifying for the final rule’s market making exclusion. Relative to the proposal, this change should decrease compliance burden by allowing banking organizations to use a single methodology for identifying market making activities, rather than two similar, but non-identical regulatory standards. This approach would capture essentially the same set of exposures as the proposal’s standard. However, the final rule’s definition of ‘‘excluded covered debt instrument’’ differs from the proposal by referring to the relevant provisions of each agency’s rule implementing the market making exemption in the Volcker Rule.33 The proposal also included a simpler deduction approach for advanced approaches banking organizations that are not U.S. GSIB banking organizations given that these banking organizations an unconsolidated financial institution’’ and ‘‘indirect exposure’’). 33 See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board); 12 CFR 351.4 (FDIC). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 pose less systemic risks than U.S. GSIBs. Unlike a U.S. GSIB, these banking organizations can include any non-significant investments in covered debt instruments of unconsolidated financial institutions in the five percent exclusion (i.e., use of the exclusion is not restricted to only those investments held in connection to market making activities). Any amount in excess of this five percent exclusion would be subject to the 10 percent threshold for nonsignificant investments deduction on a net long basis. The agencies did not receive comments on this provision of the proposal. Therefore, the final rule implements the five percent exclusion for advanced approaches banking organizations that are not U.S. GSIBs as proposed. As noted above, an advanced approaches banking organization could exclude certain investments in covered debt instruments, as applicable, from the 10 percent threshold for nonsignificant investments calculation and potential deduction under section __ .22(c)(4) if the aggregate amount of covered debt instruments, measured by gross long position, were five percent or less of its common equity tier 1 capital. To achieve consistency with the TLAC Holdings standard and with the calculation of the 10 percent threshold for non-significant investments deduction, the agencies are modifying the calculation for determining the amount of covered debt instruments that can be omitted from the 10 percent threshold for non-significant investments calculation. Under the final rule, an advanced approaches banking organization can omit covered debt instruments from the 10 percent threshold calculation and potential deduction under section __.22(c)(4) if the aggregate amount of covered debt instruments, measured by gross long position, is five percent or less of the sum of the banking organization’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under section __.22(a) through __.22(c)(3), net of associated deferred tax liabilities (DTLs). This includes, for example, deductions related to goodwill, intangibles, and deferred tax assets, and adjustments related to accumulated net gains and losses on cash flow hedges. The agencies believe that to achieve consistency and clarity throughout the deduction framework, the amount of covered debt instruments that can be omitted from the 10 percent threshold for non-significant investments calculation should be computed using PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 the same basis as the 10 percent threshold for non-significant investments calculation itself. The agencies intend to monitor advanced approaches banking organizations’ holdings of covered debt instruments in the form of synthetic exposures to ensure that the capital held for these positions is commensurate with risk and that such holdings do not raise safety and soundness concerns. Further, to better understand advanced approaches banking organizations’ risk from exposures to the capital of unconsolidated financial institutions, the agencies may issue an information collection proposal to collect quarterly data on advanced approaches banking organizations’ non-significant investments in the capital of unconsolidated financial institutions and excluded covered debt instruments, as applicable. Some commenters disagreed with the proposal’s design of the exclusions for covered debt instruments, which measures positions on a gross long basis. These commenters suggested that the measurement of the exclusions for covered debt instruments be based on the ‘‘net long position,’’ in accordance with the agencies’ capital rule, which allows gross long positions to be offset against qualifying short positions.34 The commenters noted that the 10 percent threshold for non-significant investments is based on the ‘‘net long position’’ and suggested that the exclusions for covered debt instrument be consistent with that standard. Further, commenters stated that finalizing the exclusions for covered debt instruments based on a net long position measurement basis would allow advanced approaches banking organizations to better support the depth and liquidity of market making in TLAC-eligible debt instruments, because market making activities are typically well hedged and a ‘‘net long position’’ would allow more positions to qualify for the exclusions. The final rule maintains measurement of the exclusions for covered debt instruments based on the gross long position. Moving to a ‘‘net long position’’ measurement could undermine the agencies’ goal of reducing interconnectedness among large and internationally active banking organizations as it would allow such banking organizations to accumulate exposure to covered debt instruments significantly beyond the threshold envisioned in the proposal. Further, advanced approaches banking 34 See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h) (Board); 12 CFR 324.22(h) (FDIC). E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations organizations are able to assign hedged covered debt instrument exposures to the 10 percent threshold for nonsignificant investments on a net long basis. The optional exclusions remain available to support market making activities such as accumulating short term cash positions to meet customer demand and to acquire additional long positions in covered debt instruments to facilitate market stabilization during times of stress. Such an approach is consistent with financial stability goals of avoiding asset fire sales in times of stress, encouraging risk-mitigating hedges, and reducing interconnectedness while still supporting deep and liquid markets for TLAC-eligible debt instruments. jbell on DSKJLSW7X2PROD with RULES2 F. Corresponding Deduction Approach Under the corresponding deduction approach, a banking organization must apply any required deduction to the component of capital for which the underlying instrument would qualify if it were issued by the banking organization.35 If the banking organization does not have enough of the component of capital to fully effect the deduction, the corresponding deduction approach provides that any amount of the investment that has not already been deducted would be deducted from the next, more subordinated component of capital.36 If, for example, a banking organization has insufficient amounts of tier 2 capital and additional tier 1 capital to effect a required deduction, the banking organization would need to deduct from common equity tier 1 capital the amount of the investment that exceeds the tier 2 and additional tier 1 capital of the banking organization.37 The proposal would have amended the corresponding deduction approach in section __.22(c)(2) of the capital rule to specify that an investment in a covered debt instrument by an advanced approaches banking organization would have been subject to the corresponding deduction approach, with the covered debt instrument treated as a tier 2 capital instrument. Some commenters disagreed with this approach and, instead, asked the agencies to treat investments in covered debt instruments as a common equity tier 1 capital instrument or, as applicable, allow deductions under the 35 See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); and 12 CFR 324.22(c)(2) (FDIC). 36 See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2) and (f) (Board); and 12 CFR 324.22(c)(2) and (f) (FDIC). 37 See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12 CFR 324.22(f) (FDIC). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 corresponding deduction approach from own TLAC-eligible debt instruments. As stated earlier, requiring a deduction of a covered debt instrument from tier 2 capital should serve as a sufficiently prudent and simple approach that dis-incentivizes advanced approaches banking organizations’ investments in such instruments and thereby supports the objectives of reducing both interconnectedness within the financial system and systemic risks. Accordingly, the agencies are finalizing the proposal’s amendments to the corresponding deduction approach in section __ .22(c)(2) of the capital rule G. Net Long Position Calculation The proposal would have followed the same general approach as currently provided under the agencies’ capital rule regarding the calculation of the amount of any deduction and the treatment of guarantees and indirect investments for purposes of the deductions. Under the capital rule, the amount of a banking organization’s investment in its own capital instrument or in the capital of an unconsolidated financial institution subject to deduction is the banking organization’s net long position in the capital instrument as calculated under section __.22(h) of the capital rule. Under section __.22(h), a banking organization may net certain qualifying short positions in a capital instrument against a gross long position in the same instrument to determine the net long position. The proposal would have modified section __.22(h) of the capital rule such that an advanced approaches banking organization would determine its net long position in an exposure to its own covered debt instrument, as applicable, or in a covered debt instrument issued by an unconsolidated financial institution in the same manner as currently provided for investments in an institution’s own capital instruments or investments in the capital of an unconsolidated financial institution, respectively. Consistent with the capital rule, the calculation of a net long position under the proposal would have taken into account direct investments in covered debt instruments as well as indirect exposures to covered debt instruments held through investment funds. A banking organization has three options under the capital rule to measure its gross long position in a capital instrument held indirectly PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 717 through an investment fund.38 The proposal would have amended section _ _.22(h)(2)(iii) of the capital rule to provide the same three options to determine the gross long position in a covered debt instrument held through an investment fund. The agencies received no comments on this aspect of the proposal and the final rule adopts the changes as proposed. The agencies’ capital rule sets qualifying criteria for recognizing short positions that can be netted against gross long positions; specifically, a short position must be in the ‘‘same instrument’’ as the gross long position and must meet minimum maturity requirements, among other requirements.39 The proposal would not have changed these operational criteria for recognizing short positions in the calculation of a net long position. Some commenters advocated for changes to the capital rule’s requirements for recognizing a short position under section __.22(h)(3). These commenters argued that the capital rule should be modified to not require short positions to be in the ‘‘same instrument’’ as the gross long position when calculating the net long position. Instead, commenters recommended that the final rule allow recognized short positions to be in any instrument that is pari passu or subordinated to the gross long position’s instrument. These commenters recommended that this change should also apply to calculating the net long position of investments in covered debt instruments in the final rule. The agencies have consistently maintained that recognition of short positions under the net long position calculation are required to be in the ‘‘same instrument’’ as a matter of prudent risk management and hedging practices. To recognize short positions in other than the ‘‘same instrument’’ would potentially undermine the effectiveness of risk mitigating hedges. Accordingly, the final rule adopts the calculation of the net long position as proposed. Under the proposal, for purposes of any deduction required for an advanced approaches banking organization’s investment in the capital of an unconsolidated financial institution, the amount of a covered debt instrument would have included any contractual obligations the advanced approaches banking organization has to purchase such covered debt instruments. The 38 See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR 217.12(h)(2)(iii) (Board); and 12 CFR 324.22(h) (2)(iii) (FDIC). 39 See 12 CFR 3.22(h)(3) (OCC); 12 CFR 217.12(h)(3) (Board); and 12 CFR 324.22(h)(3) (FDIC). E:\FR\FM\06JAR2.SGM 06JAR2 718 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 agencies received no comment on this aspect of the proposal, and the final rule adopts this change as proposed. VI. Technical Amendment and Other Comments The agencies proposed amending the definition of ‘‘investment in the capital of an unconsolidated financial institution’’ in section __.2 of the capital rule to correct a drafting error in that definition. The agencies did not receive any comment with regard to the proposed technical amendment. However, in the period between the issuance of the proposal and this final rule, this technical amendment was implemented by the agencies’ final rule to simplify the capital rule.40 A few commenters suggested that the proposal should go further in limiting the exposure of advanced approaches banking organizations to GSIBs, given their size and the risk their failure could pose to the financial system. These commenters argued that the final rule should ensure that the cost of TLAC debt better reflect heightened risks of GSIBs and that the agencies should require U.S. GSIBs to hold more common equity tier 1 capital. Other commenters suggested that the agencies consider existing elements of the regulatory framework—such as the single counterparty credit limit and the GSIB surcharge—when finalizing the deduction framework. Under the capital rule, each agency has the authority to require a banking organization to hold additional capital based on the banking organization’s risk profile.41 Similarly, while other elements of the regulatory framework address the systemic risks of large, internationally active banking organizations or concentrations of exposures to counterparties, no existing regulation specifically address the risks associated with investments in TLACeligible debt instruments. The agencies, therefore, are finalizing the proposal to establish a regulatory capital treatment for investments in covered debt instruments with certain modifications, as previously described. The proposal did not contemplate providing a transition period for implementation of the final rule by advanced approaches banking organizations. Some commenters requested that the agencies provide banking organizations with a transition period to ease compliance burden. Specifically, commenters requested that the agencies provide 18 months before 40 See 84 FR 35234 (July 22, 2019). 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1) (Board); 12 CFR 324.1(d)(1) (FDIC). banking organizations must effectuate the deduction treatment. These commenters asserted that a transition period would give banking organizations more time to build out systems to track which instruments are covered debt instruments and therefore subject to the deduction framework. A commenter requested that the agencies not require deduction of any unsecured debt instrument issued by a GSIB until the information necessary to determine whether the instrument is a covered debt instrument is available. The agencies maintain the supervisory expectation that large and internationally active banking organizations should be deeply knowledgeable of the securities exposures on their own balance sheets, if only for the purposes of prudent risk management. The final rule will become effective on April 1, 2021. The agencies believe this effective date provides sufficient time for advanced approaches banking organizations to evaluate investments in covered debt instruments and apply the final rule’s deduction treatment. In addition to the above, the agencies are making certain technical amendments to section __.10 of the capital rule to more clearly differentiate between requirements applicable to advanced approaches banking organizations and those applicable to Category III banking organizations. In section __.10 of the capital rule, as amended by the recent interagency tailoring rule,42 paragraphs (c)(1)–(3) describe the capital ratio calculations applicable to advanced approaches banking organizations, whereas paragraph 10(c)(4) of the capital rule describes the supplementary leverage ratio calculations applicable to both advanced approaches banking organizations and Category III banking organizations. To avoid confusion, the agencies are amending section __.10 of the capital rule such that paragraph (c) will provide only the supplementary leverage ratio requirements. The advanced approaches capital calculations will be moved to revised paragraph (d) of section __.10 of the capital rule. Current paragraph (d), Capital adequacy, will be re-designated as paragraph (e) of section __.10 of the capital rule. The agencies are also amending language in sections __.2 and __.121 of the capital rule to correct cross-references in light of the amendments described above. These technical amendments do not amend any substantive requirements applicable to banking organizations. VII. Amendments to the Board’s TLAC Rule In 2018, the Board issued a notice of proposed rulemaking that, among other items, included minor proposed amendments to the Board’s TLAC rule.43 The proposal included revisions to ensure that the external TLAC riskweighted buffer level, TLAC leverage buffer level, and the TLAC buffer level for covered IHCs would be amended to use the same haircuts applicable to LTD instruments that are currently used to calculate outstanding minimum required TLAC amounts, which do not include a 50 percent haircut on LTD instruments with a remaining maturity of between one and two years. Another proposed amendment was to ensure that the term ‘‘external TLAC risk-weighted buffer’’ is used consistently in the TLAC rule. The proposal also would have provided that a new covered IHC would always have three years to conform to most of the requirements of the TLAC rule, and to align the articulation of the methodology for calculating the covered IHC’s LTD instrument amount with the same methodology used for GSIBs. The Board received minimal comments on these proposed revisions to the TLAC rule within the comments received on its proposal overall and the comments received were supportive of the specific proposed revisions. As a result, the Board is issuing these revisions in the final rule without change from the proposal. VIII. Changes to Regulatory Reporting A. Deductions From Tier 2 Capital Related to Investments in Covered Debt Instruments and Excluded Covered Debt Instruments In the April 2019 rulemaking, the Board proposed to modify the instructions to the Consolidated Financial Statements for Holding Companies (FR Y–9C), Schedule HC–R, Part I and Part II, to effectuate the deductions from regulatory capital for Board-regulated advanced approaches banking organizations related to investments in covered debt instruments and excluded covered debt instruments as described in the proposal. Specifically, the Board would have modified the instructions of the FR Y– 9C for Schedule HC–R, Part I, item 33, ‘‘Tier 2 capital deductions.’’ On the FR Y–9C, a covered BHC would have been required to deduct from tier 2 capital 41 See VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 42 84 PO 00000 FR 59230 (November 1, 2019). Frm 00012 Fmt 4701 Sfmt 4700 43 83 E:\FR\FM\06JAR2.SGM FR 17317, 17322 (April 19, 2018). 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 the aggregate amount of its investments in covered debt instruments that, when combined with the banking organization’s other non-significant investments in the capital of unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. Also, if an excluded covered debt instrument were held by a covered BHC for more than 30 business days, or no longer held in connection with market making-related activities, the excluded covered debt instrument would have been deducted from tier 2 capital. In addition, for purposes of the deduction requirements related to nonsignificant investments in the capital of unconsolidated financial institutions, Board-regulated advanced approaches banking organizations that are not covered BHCs would have been required to deduct from tier 2 capital those investments in covered debt instruments that exceed five percent of common equity tier 1 capital, and that also, when combined with the banking organization’s other non-significant investments in unconsolidated financial institutions, exceed 10 percent of the common equity tier 1 capital of the banking organization. The Board also would have modified the instructions for calculating other deduction-related and risk-weighted asset line items to incorporate investments in covered debt instruments and excluded covered debt instruments, as applicable, by Boardregulated advanced approaches banking organizations. In October 2019, the Federal Financial Institutions Examination Council (FFIEC) separately proposed to modify the Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices (FFIEC 031), Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only (FFEIC 041) (collectively with the FFIEC 031, the Call Report),44 and Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101) in a manner consistent with the changes described above to the FR Y–9C to effectuate the proposal’s deduction approach for investments in covered debt instruments and excluded covered debt instruments, as applicable.45 44 The proposed modifications would not affect the Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only and Total Assets Less than $1 Billion (FFIEC 051) because banks and savings associations that are advanced approaches banking organizations are not eligible to file the FFIEC 051 report. 45 See 84 FR 53227 (October 4, 2019). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 In March 2020, the Board separately proposed conforming changes to the FR Y–14 to effectuate the proposed deduction framework for investments in covered debt instruments.46 With respect to the FR Y–9C proposed changes, one commenter requested clarification on the sequencing of reporting changes related to effectuating deductions for covered debt instruments and the effective date of the final rule. Specifically, this commenter requested that the effective date of the final rule should precede any requirement to begin effectuating deductions related to investments in covered debt instruments on regulatory reports. The agencies confirm that the effective date of the final rule will precede any reporting requirements related to implementing the deduction framework for covered debt instruments. The Board received no comments on the FR Y–14 proposed changes. As described above, reporting changes to effectuate the deduction framework for investments in covered debt instruments described in the proposal were proposed separately for the (1) FR Y–9C, (2) FFIEC 101 and Call Report, and (3) FR Y–14. The Board is finalizing as proposed, changes to the FR Y–9C and FR Y–14, to effectuate the deduction framework for investments in covered debt instruments in this Federal Register notice. The agencies will address comments submitted in connection with the FFIEC’s October 2019 proposal when those forms and instructions are finalized in a separate Federal Register notice, consistent with the final rule. B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs and Covered IHCs In the April 2019 rulemaking, the Board also proposed to modify Schedule HC–R, Part I of the FR Y–9C by adding new data items that would publicly disclose: (1) The long-term debt and TLAC for covered BHCs and covered IHCs; (2) these banking organizations’ long-term debt and TLAC ratios to ensure compliance with the TLAC rule; (3) TLAC buffers; and (4) amendments to the instructions for the calculation of eligible retained income (item 47), institution-specific capital buffer (items 46.a and 46.b), and distributions and discretionary bonus payments (item 48) for covered BHCs and covered IHCs.47 Commenters suggested that the Board clarify in the final rule when changes to FR Y–9C related to long-term debt and TLAC reporting disclosures will become 46 See 47 See PO 00000 85 FR 15776 (March 19, 2020). 84 FR 13823–13824 (April 8, 2019). Frm 00013 Fmt 4701 Sfmt 4700 719 effective. Reporting changes for deductions related to investments in covered debt instruments on the FR Y– 9C will not go into effect until after the final rule’s effective date. In March 2020, the Board separately proposed conforming changes to the FR Y–14 to disclose new items related to long-term debt and TLAC, as described above.48 In response to the proposal, commenters requested that the Board clarify how U.S. GSIBs are to calculate the TLAC rule’s leverage ratios on the FR Y–9C report. More specifically, commenters suggested the Board clarify that U.S. GSIBs should not be required to report long-term debt and TLAC leverage ratios based on total assets because U.S. GSIBs’ applicable longterm debt and TLAC leverage requirement is based on the denominator for the supplementary leverage ratio. Commenters noted that only covered IHCs are required to report the long-term debt and TLAC leverage ratios based on total assets. The Board confirms that reporting of the long-term debt and TLAC leverage requirement for U.S. GSIBs will only be based upon the supplementary leverage ratio denominator, consistent with the TLAC rule’s leverage requirement. The Board received no comments on the FR Y–14 proposed changes. The Board is finalizing the proposed changes to the FR Y–9C and FR Y–14 to require covered BHCs and covered IHCs to report their long-term debt and TLAC resources, with modifications in response to comment as described above, in this Federal Register notice. Some commenters suggested the Board develop a more robust disclosure regime related to TLAC so that the level of risk is appropriately priced into these instruments. They stated that disclosures will incentivize GSIBs to meet their TLAC requirements with equity rather than debt instruments. Commenters offered suggestions for improving disclosures by noting that the agencies should collaborate with the Securities and Exchange Commission to require plain-language warnings regarding risk of bail-in to investors (1) when purchasing a TLAC instrument in their brokerage account and (2) in offering materials published by pension and mutual funds that invest in TLAC instruments. The Board does not have the authority to change disclosures required by the Securities and Exchange Commission related to securities issuances or sales to retail investors. The interagency statement on retail sales of nondeposit investments 48 See E:\FR\FM\06JAR2.SGM 85 FR 15776 (March 19, 2020). 06JAR2 720 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations products should ensure certain disclosures for retail sales programs involving mutual funds, annuities and other nondeposit investment products.49 Further, the Board does not have the authority to mandate disclosures by pension or mutual funds. The final rule does not incorporate these suggestions. IX. Regulatory Analyses jbell on DSKJLSW7X2PROD with RULES2 A. Paperwork Reduction Act Certain provisions of the final rule contain ‘‘collection of information’’ within the meaning of the Paperwork Reduction Act of 1995 (PRA).50 In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currentlyvalid Office of Management and Budget (OMB) control number. The final rule revises section __.22(c), (f), and (h) of the capital rule to incorporate the proposed deduction approach for investments in covered debt instruments. Several new definitions are added to section __.2 to effectuate these deductions. Each agency has an information collection related to its regulatory capital rules. The OMB control number for the OCC is 1557–0318, Board is 7100–0313, and FDIC is 3064–0153. The final rule will not, however, result in changes to burden under these information collections and therefore no submissions will be made under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB’s implementing regulations (5 CFR 1320) for each of the agencies’ regulatory capital rules. In addition, the final rule requires changes to the Call Reports (OMB No. 1557–0081 (OCC), 7100–0036 (Board), and 3064–0052 (FDIC)), and the FFIEC 101 (OMB No. 1557–0239 (OCC), 7100– 0319 (Board), and 3064–0159 (FDIC)), which will be addressed in one or more separate Federal Register notices. The final rule requires changes to the Consolidated Financial Statements for Holding Companies (FR Y–9C; OMB No. 7100–0128) and the Capital Assessments and Stress Testing Reports (FR Y–14A/Q/M; OMB No. 7100–0341). The Board reviewed the final rule under the authority delegated to the Board by OMB. 49 See ‘‘Interagency Statement on Retail Sales of Nondeposit Investment Products.’’ OCC Bulletin 1994–13 (OCC); SR 94–11 (FIS) (Board); and FIL– 9–94 (FDIC). 50 44 U.S.C. 3501–3521. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 Revised Collection (Board only) Title of Information Collection: Consolidated Financial Statements for Holding Companies. Agency form number: FR Y–9C, FR Y– 9LP, FR Y–9SP, FR Y–9ES, and FR Y– 9CS. OMB control number: 7100–0128. Effective date: June 30, 2021. Frequency: Quarterly, semiannually, and annually. Affected Public: Businesses or other for-profit. Respondents: Bank holding companies (BHCs), savings and loan holding companies (SLHCs), securities holding companies (SHCs), and U.S. Intermediate Holding Companies (IHCs) (collectively, holding companies (HCs)). Estimated number of respondents: FR Y–9C (non-advanced approaches (AA) HCs community bank leverage ratio (CBLR)) with less than $5 billion in total assets—71, FR Y–9C (non AA HCs CBLR) with $5 billion or more in total assets—35, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total assets—84, FR Y–9C (non AA HCs nonCBLR) with $5 billion or more in total assets—154, FR Y–9C (AA HCs)—19, FR Y–9LP—434, FR Y–9SP—3,960, FR Y– 9ES—83, FR Y–9CS—236. Estimated average hours per response: Reporting FR Y–9C (non AA HCs CBLR) with less than $5 billion in total assets— 29.17, FR Y–9C (non AA HCs CBLR) with $5 billion or more in total assets— 35.14, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total assets—41.01, FR Y–9C (non AA HCs non-CBLR) with $5 billion or more in total assets—46.98, FR Y–9C (AA HCs)—49.30, FR Y–9LP—5.27, FR Y– 9SP—5.40, FR Y–9ES—0.50, FR Y– 9CS—0.50. Recordkeeping FR Y–9C (non-advanced approaches HCs with less than $5 billion in total assets), FR Y–9C (non-advanced approaches HCs with $5 billion or more in total assets), FR Y–9C (advanced approaches HCs), and FR Y–9LP: 1.00 hour; FR Y–9SP, FR Y–9ES, and FR Y– 9CS: 0.50 hours. Estimated annual burden hours: Reporting FR Y–9C (non AA HCs CBLR) with less than $5 billion in total assets— 8,284, FR Y–9C (non AA HCs CBLR) with $5 billion or more in total assets— 4,920, FR Y–9C (non AA HCs nonCBLR) with less than $5 billion in total assets—13,779, FR Y–9C (non AA HCs non-CBLR) with $5 billion or more in total assets—28,940, FR Y–9C (AA PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 HCs)—3,747, FR Y–9LP—9,149, FR Y– 9SP—42,768, FR Y–9ES—42, FR Y– 9CS—472. Recordkeeping FR Y–9C—1,452, FR Y–9LP—1,736, FR Y–9SP—3,960, FR Y–9ES—42, FR Y–9CS—472. General description of report: The FR Y–9 family of reporting forms continues to be the primary source of financial data on holding companies (HCs) on which examiners rely between on-site inspections. Financial data from these reporting forms is used to detect emerging financial problems, review performance, conduct pre-inspection analysis, monitor and evaluate capital adequacy, evaluate HC mergers and acquisitions, and analyze an HC’s overall financial condition to ensure the safety and soundness of its operations. The FR Y–9C serves as the standardized financial statements for certain consolidated holding companies. The Board requires HCs to provide standardized financial statements to fulfill the Board’s statutory obligation to supervise these organizations. HCs file the FR Y–9C on a quarterly basis. Legal authorization and confidentiality: The reporting and recordkeeping requirements associated with the FR Y–9 series of reports are authorized for BHCs pursuant to section 5 of the Bank Holding Company Act (‘‘BHC Act’’); for SLHCs pursuant to section 10(b)(2) and (3) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(b)(2) and (3), as amended by sections 369(8) and 604(h)(2) of the Dodd-Frank Wall Street and Consumer Protection Act (‘‘Dodd-Frank Act’’); for IHCs pursuant to section 5 of the BHC Act, as well as pursuant to sections 102(a)(1) and 165 of the Dodd-Frank Act; and for securities holding companies pursuant to section 618 of the Dodd-Frank Act. Except for the FR Y–9CS report, which is expected to be collected on a voluntary basis, the obligation to submit the remaining reports in the FR Y–9 series of reports and to comply with the recordkeeping requirements set forth in the respective instructions to each of the other reports, is mandatory. With respect to the FR Y–9C report, Schedule HI’s Memoranda item 7(g) ‘‘FDIC deposit insurance assessments,’’ Schedule HC–P’s item 7(a) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to U.S. government agencies and government sponsored agencies,’’ and Schedule HC–P’s item 7(b) ‘‘Representation and warranty reserves for 1–4 family residential mortgage loans sold to other parties’’ are considered confidential commercial and E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations financial information. Such treatment is appropriate under exemption 4 of the Freedom of Information Act (‘‘FOIA’’), because these data items reflect commercial and financial information that is both customarily and actually treated as private by the submitter, and which the Board has previously assured submitters will be treated as confidential. It also appears that disclosing these data items may reveal confidential examination and supervisory information, and in such instances, the information also would be withheld pursuant to exemption 8 of the FOIA, which protects information related to the supervision or examination of a regulated financial institution. In addition, for both the FR Y–9C report and the FR Y–9SP report, Schedule HC’s Memoranda item 2.b., the name and email address of the external auditing firm’s engagement partner, is considered confidential commercial information and protected by exemption 4 of the FOIA, if the identity of the engagement partner is treated as private information by HCs. The Board has assured respondents that this information will be treated as confidential since the collection of this data item was proposed in 2004. Additionally, items on the FR Y–9C, Schedule HC–C for loans modified under Section 4013, data items Memorandum items 16.a, ‘‘Number of Section 4013 loans outstanding’’; and Memorandum items 16.b, ‘‘Outstanding balance of Section 4013 loans’’ are considered confidential. While the Board generally makes institution-level FR Y–9C report data publicly available, the Board is collecting Section 4013 loan information as part of condition reports for the impacted HCs and the Board considers disclosure of these items at the HC level would not be in the public interest. Such information is permitted to be collected on a confidential basis, consistent with 5 U.S.C. 552(b)(8). In addition, holding companies may be reluctant to offer modifications under Section 4013 if information on these modifications made by each holding company is publicly available, as analysts, investors, and other users of public FR Y–9C report information may penalize an institution for using the relief provided by the CARES Act. The Board may disclose Section 4013 loan data on an aggregated basis, consistent with confidentiality or as otherwise required by law. Aside from the data items described above, the remaining data items collected on the FR Y–9C report and the FR Y–9SP report are generally not VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 accorded confidential treatment. The data items collected on FR Y–9LP, FR Y–9ES, and FR Y–9CS reports, are also generally not accorded confidential treatment. As provided in the Board’s Rules Regarding Availability of Information, however, a respondent may request confidential treatment for any data items the respondent believes should be withheld pursuant to a FOIA exemption. The Board will review any such request to determine if confidential treatment is appropriate, and will inform the respondent if the request for confidential treatment has been granted or denied. To the extent the instructions to the FR Y–9C, FR Y–9LP, FR Y–9SP, and FR Y–9ES reports each respectively direct the financial institution to retain the workpapers and related materials used in preparation of each report, such material would only be obtained by the Board as part of the examination or supervision of the financial institution. Accordingly, such information is considered confidential pursuant to exemption 8 of the FOIA. In addition, the workpapers and related materials may also be protected by exemption 4 of the FOIA, to the extent such financial information is treated as confidential by the respondent. Current Actions: As discussed in detail in section VIII above, several comments were received on the proposed changes to the FR Y–9C. Commenters requested that the effective date of the final rule precede proposed changes to regulatory reports. The agencies confirmed that the final rule will be effective before changes are implemented to regulatory reports. The final rule is effective April 1, 2021, and the changes to the FR Y–9C are effective June 30, 2021. Also, commenters requested that the Board clarify that U.S. GSIBs will report long-term debt and TLAC leverage requirements based upon the supplementary leverage ratio denominator. The Board agreed and clarified this requirement. Finally, some commenters suggested that the Board develop a more robust disclosure regime related to TLAC, including collaborating with the SEC. The Board did not accept this comment for the reasons noted above. Some of the item numbers below have changed since the proposed rule due to other FR Y–9C reporting changes to Schedule HC–R that have been implemented since that time. To implement the reporting requirements of the final rule, the Board revises the FR Y–9C, Schedule HC–R, Part I, Regulatory Capital Components and Ratios, to amend instructions for line items 11, 17, 24, and 43 to effectuate the deductions from PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 721 regulatory capital for advanced approaches holding companies related to investments in covered debt instruments and excluded covered debt instruments as described above. Further, the Board proposes to revise the FR Y– 9C, Schedule HC–R, Part II, RiskWeighted Assets, to amend instructions for line items 2(a), 2(b), 7, and 8 to incorporate investments in covered debt instruments and excluded debt instruments, as applicable, by advanced approaches holding companies in their calculation of risk-weighted assets. In addition, the Board revises the FR Y–9C, Schedule HC–R, Part I, Regulatory Capital Components and Ratios, to create new line items and instructions to allow the BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to publicly report their long-term debt (LTD) and total loss-absorbing capacity (TLAC) in accordance, respectively, with 12 CFR part 252, subpart G and 12 CFR part 252, subpart P. Specifically, new line items are created to report, as applicable, BHCs of U.S GSIBs’ and IHCs of foreign GSIBs’ (1) outstanding eligible LTD (item 50); (2) TLAC (item 51); (3) LTD standardized risk-weighted asset ratio (item 52, column A); (4) TLAC standardized risk-weighted asset ratio (item 52, column B); (5) LTD advanced approaches risk-weighted asset ratio (item 53, column A); (6) TLAC advanced approaches riskweighted asset ratio (item 53, column B); (7) IHCs of foreign GSIBs only: LTD leverage ratio (item 54, column A); (8) IHCs of foreign GSIBs only: TLAC leverage ratio (item 54, column B); (9) LTD supplementary leverage ratio (item 55, column A); (10) TLAC supplementary leverage ratio (item 55, column B); (11) institution-specific TLAC risk-weighted asset buffer necessary to avoid limitations on distributions and discretionary bonus payments (item 57(a)); and (12) TLAC leverage buffer necessary to avoid limitations on distributions and discretionary bonus payments (item 57(b)). Existing line items 50(a), 50(b), 51, 52, and 53 are re-numbered to 56(a), 56(b), 58, 59, and 60, respectively, and instructions’ references updated, to account for the proposed inclusion of the new data collection items described above. Finally, the instructions for renumbered line item 59, ‘‘Distributions and discretionary bonus payments during the quarter,’’ are amended for the BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to reflect maximum payout amounts that take into account a firm’s TLAC risk-weighted and leverage buffers reported in line items 57(a) and 57(b), respectively. The final E:\FR\FM\06JAR2.SGM 06JAR2 722 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations reporting forms and instructions will become available in the near future on the Board’s public website at https:// www.federalreserve.gov/apps/ reportforms/review.aspx. Revised Collection (Board only) jbell on DSKJLSW7X2PROD with RULES2 Title of Information Collection: Capital Assessments and Stress Testing Reports. Agency form number: FR Y–14A/Q/ M. OMB control number: 7100–0341. Effective date: June 30, 2021. Frequency: Annually, quarterly, and monthly. Respondents: These collections of information are applicable to bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), and savings and loan holding companies (SLHCs) 51 with $100 billion or more in total consolidated assets, as based on: (i) The average of the firm’s total consolidated assets in the four most recent quarters as reported quarterly on the firm’s Consolidated Financial Statements for Holding Companies (FR Y–9C; OMB No. 7100– 0128); or (ii) if the firm has not filed an FR Y–9C for each of the most recent four quarters, then the average of the firm’s total consolidated assets in the most recent consecutive quarters as reported quarterly on the firm’s FR Y–9Cs. Reporting is required as of the first day of the quarter immediately following the quarter in which the respondent meets this asset threshold, unless otherwise directed by the Board. Estimated number of respondents: FR Y–14A/Q: 36; FR Y–14M: 34.52 Estimated average hours per response: FR Y–14A: 929 hours; FR Y–14Q: 2,201 hours; FR Y–14M: 1,072 hours. On-going Automation Revisions: 480 hours; FR Y–14 Attestation On-going Attestation: 2,560 hours. Estimated annual burden hours: FR Y–14A: 33,444 hours; FR Y–14Q: 316,944 hours; FR Y–14M: 437,376 hours; FR Y–14 On-going Automation Revisions: 17,280 hours; FR Y–14 Attestation On-going Attestation: 33,280 hours. 51 SLHCs with $100 billion or more in total consolidated assets became members of the FR Y– 14Q and FR Y–14M panels effective June 30, 2020, and will join the FR Y–14A panel effective December 31, 2020. See 84 FR 59032 (November 1, 2019). 52 The estimated number of respondents for the FR Y–14M is lower than for the FR Y–14Q and FR Y– 14A because, in recent years, certain respondents to the FR Y–14A and FR Y–14Q have not met the materiality thresholds to report the FR Y–14M due to their lack of mortgage and credit activities. The Board expects this situation to continue for the foreseeable future. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 General description of report: This family of information collections is composed of the following three reports: • The FR Y–14A collects quantitative projections of balance sheet, income, losses, and capital across a range of macroeconomic scenarios and qualitative information on methodologies used to develop internal projections of capital across scenarios.53 • The quarterly FR Y–14Q collects granular data on various asset classes, including loans, securities, trading assets, and PPNR for the reporting period. • The monthly FR Y–14M is comprised of three retail portfolio- and loan-level schedules, and one detailed address-matching schedule to supplement two of the portfolio and loan-level schedules. The data collected through the FR Y– 14A/Q/M reports provide the Board with the information needed to help ensure that large firms have strong, firmwide risk measurement and management processes supporting their internal assessments of capital adequacy and that their capital resources are sufficient given their business focus, activities, and resulting risk exposures. The reports are used to support the Board’s annual Comprehensive Capital Analysis and Review (CCAR) and Dodd Frank Act Stress Test (DFAST) exercises, which complement other Board supervisory efforts aimed at enhancing the continued viability of large firms, including continuous monitoring of firms’ planning and management of liquidity and funding resources, as well as regular assessments of credit, market and operational risks, and associated risk management practices. Information gathered in this data collection is also used in the supervision and regulation of respondent financial institutions. Respondent firms are currently required to complete and submit up to 17 filings each year: One annual FR Y–14A filing, four quarterly FR Y–14Q filings, and 12 monthly FR Y–14M filings. Compliance 53 On October 10, 2019, the Board issued a final rule that eliminated the requirement for firms subject to Category IV standards to conduct and publicly disclose the results of a company-run stress test. See 84 FR 59032 (Nov. 1, 2019). That final rule maintained the existing FR Y–14 substantive reporting requirements for these firms in order to provide the Board with the data it needs to conduct supervisory stress testing and inform the Board’s ongoing monitoring and supervision of its supervised firms. However, as noted in the final rule, the Board intends to provide greater flexibility to banking organizations subject to Category IV standards in developing their annual capital plans and consider further change to the FR Y–14 forms as part of a separate proposal. See 84 FR 59032, 59063. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 with the information collection is mandatory. Current actions: On March 19, 2020, the Board proposed to revise the FR Y– 14 reports to collect TLAC and LTD information.54 The Board did not receive any comments on the proposed TLAC and LTD revisions. The Board has modified the Capital Assessments and Stress Testing (FR Y–14A and Q; OMB No. 7100–0341) in a manner consistent with the changes described above to the FR Y–9C. In addition, the Board has renumbered items in the FR Y–14A, Schedule A.1.d (Capital) instructions to correspond with related items on the FR Y–9C. The Board has adopted, as proposed, the following revisions to FR Y–14A, Schedule A.1.d, and FR Y–14Q, Schedule D, effective for the June 30, 2021, as of date: FR Y–14A, Schedule A.1.d (Capital) In order to align Schedule A.1.d with the FR Y–9C, the Board has added the following items to Schedule A.1.d: • ‘‘Outstanding eligible long-term debt’’; • ‘‘Total loss-absorbing capacity’’; • ‘‘LTD and TLAC total risk-weighted assets ratios’’; • ‘‘IHCs of foreign GSIBs only: LTD and TLAC leverage ratios’’; • ‘‘LTD and TLAC supplementary leverage ratios’’; • ‘‘Institution-specific TLAC buffer necessary to avoid limitations on distributions discretionary bonus payments’’; • ‘‘TLAC risk-weighted buffer’’; and • ‘‘TLAC leverage buffer.’’ FR Y–14Q, Schedule D (Regulatory Capital) The Board has revised the instructions for item 1 (‘‘Aggregate amount of non-significant investments in the capital of unconsolidated financial institutions’’) to require banking organizations subject to Category I and II standards to include covered debt instruments. B. Regulatory Flexibility Act Analysis OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency either to provide a final regulatory flexibility analysis with a final rule for which a general notice of proposed rulemaking is required or to certify that the final rule will not have a significant, economic impact on a substantial number of small entities. The Small Business Administration (SBA) establishes size standards that define which entities are small businesses for purposes of the RFA to 54 See E:\FR\FM\06JAR2.SGM 85 FR 15776 (March 19, 2020). 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 include commercial banks and savings institutions with total assets of $600 million or less and trust companies with total assets of $41.5 million of less) or to certify that the final rule would not have a significant economic impact on a substantial number of small entities. As of December 31, 2019, the OCC supervises 745 small entities.55 As part of the OCC’s analysis, we consider whether the final rule will have a significant economic impact on a substantial number of small entities, pursuant to the RFA Because the final rule only applies to advanced approaches banking organizations it will not impact any OCC-supervised small entities. Therefore, the final rule will not have a significant economic impact on a substantial number of 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. Board: The Regulatory Flexibility Act (RFA) generally requires that, in connection with a final rulemaking, an agency prepare and make available for public comment a final regulatory flexibility analysis describing the impact of the proposed rule on small entities. However, a final regulatory flexibility analysis is not required if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $600 million that are independently owned and operated or owned by a holding company with less than or equal to $600 million in total assets.56 For the reasons described below and under section 605(b) of the RFA, the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities.57 As of December 31, 2019, there were 2,799 bank holding companies, 171 savings and loan holding companies, and 497 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 $600 million and $41.5 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 Federal savings association as a small entity. 56 See 13 CFR 121.201. Effective August 19, 2019, the SBA revised the size standards for banking organizations to $600 million in assets from $550 million in assets. 84 FR 34261 (July 18, 2019). 57 5 U.S.C. 605(b). VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 state member banks that would fit the SBA’s current definition of ‘‘small entity’’ for purposes of the RFA. The Board has considered the potential impact of the final rule on small entities in accordance with the RFA. Based on its analysis and for the reasons stated below, the Board believes that this final rule will not have a significant economic impact on a substantial number of small entities. As discussed in detail above, the final rule amends the capital rule to require advanced approaches banking organizations to deduct exposures to covered debt instruments issued by covered BHCs, covered IHCs, and foreign GSIBs and their subsidiaries. These deductions are subject to regulatory thresholds, as described above. Deductions related to investments in and exposures to covered debt instruments are effectuated by deduction from tier 2 capital according to the corresponding deduction approach, subject to applicable deduction thresholds. However, the assets of institutions subject to this final rule substantially exceed the $600 million asset threshold under which a banking organization is considered a ‘‘small entity’’ under SBA regulations.58 Because the final rule is not likely to apply to any depository institution or company with assets of $600 million or less, it is not expected to apply to any small entity for purposes of the RFA. In light of the foregoing, the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities supervised. FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires an agency, in connection with a final rule, to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of a final rule on small entities.59 However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The Small Business Administration (SBA) has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $600 million who are independently owned and operated or owned by a holding company with less than $600 million in 58 With respect to the revisions to the Board’s total loss-absorbing capacity rule, the scope of impacted institutions is different—Covered BHCs and Covered IHCs—but also only applies to institutions significantly above the threshold to be considered a ‘‘small entity.’’ 59 5 U.S.C. 601 et seq. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 723 total assets.60 Generally, the FDIC considers a significant effect to be a quantified effect in excess of 5 percent of total annual salaries and benefits per institution, or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. For the reasons described below and under section 605(b) of the RFA, the FDIC certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The FDIC supervises 3,270 institutions,61 of which 2,492 are considered small entities for the purposes of RFA.62 This final rule will affect all institutions subject to the Category I and Category II capital standards, and their subsidiaries. The FDIC supervises one institution that is a subsidiary of an institution that is subject to the Category I capital standards, and no FDICsupervised institutions are subsidiaries of institutions that are subject to the Category II capital standards.63 The one FDIC-supervised institution that would be subject to this final rule is not considered a small entity for the purposes of the RFA since it is owned by a holding company with over $600 million in total assets. Since this final rule does not affect any FDIC-supervised institutions that are defined as small entities for the purposes of the RFA, the FDIC certifies that the final rule will not have a significant economic impact on a substantial number of small entities. C. Plain Language Section 722 of the Gramm-LeachBliley Act 64 requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies have sought to present the final rule in a simple and straightforward manner and did not receive any 60 The SBA defines a small banking organization as having $600 million or less in assets, where ‘‘a financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See 13 CFR 121.201 (as amended, effective August 19, 2019). ‘‘SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.’’ See 13 CFR 121.103. Following these regulations, the FDIC uses a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the covered entity is ‘‘small’’ for the purposes of RFA. 61 FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2). 62 Call Report data, June 30, 2020. 63 Call Report data, June 30, 2020. 64 Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). E:\FR\FM\06JAR2.SGM 06JAR2 724 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations comments on the use of plain language in the proposed rule. D. OCC Unfunded Mandates Reform Act of 1995 Determination The OCC analyzed the proposed rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA).65 Under this analysis, the OCC considered whether the final 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 for inflation). Because the rule does not specifically require banks to modify their policies and procedures, the OCC has determined that there are no expenditures for the purposes of UMRA. Therefore, the OCC concludes that this final rule will not result in expenditures of $100 million or more annually by State, local, and Tribal governments, or by the private sector.66 E. Riegle Community Development and Regulatory Improvement Act of 1994 Pursuant to section 302(a) of the Riegle Community Development and Regulatory Improvement Act (RCDRIA),67 in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions (IDIs), each Federal banking agency must consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations that impose additional reporting, disclosures, or other new requirements on IDIs generally to take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.68 The Federal banking agencies considered the administrative burdens 65 2 U.S.C. 1532. on available supervisory information, the OCC determined that no OCC-supervised advanced approaches institutions currently hold TLAC instruments. Thus, there would no cost of capital associated with the implementation of this proposal. The OCC estimates that, if implemented, non-mandated, but anticipated compliance costs associated with activities such as modifying procedures and internal audit would be less than $1 million. 67 12 U.S.C. 4802(a). 68 12 U.S.C. 4802. jbell on DSKJLSW7X2PROD with RULES2 66 Based VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 and benefits of the final rule and its elective framework in determining its effective date and administrative compliance requirements. As such, the final rule will be effective on April 1, 2021. F. Congressional Review Act For purposes of Congressional Review Act, the OMB makes a determination as to whether a final rule constitutes a ‘‘major’’ rule.69 If a rule is deemed a ‘‘major rule’’ by the Office of Management and Budget (OMB), the Congressional Review Act generally provides that the rule may not take effect until at least 60 days following its publication.70 The Congressional Review Act defines a ‘‘major rule’’ as any rule that the Administrator of the Office of Information and Regulatory Affairs of the OMB finds has resulted in or is likely to result in (A) an annual effect on the economy of $100,000,000 or more; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies or geographic regions, or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreignbased enterprises in domestic and export markets.71 As required by the Congressional Review Act, the agencies will submit the final rule and other appropriate reports to Congress and the Government Accountability Office for review. List of Subjects 12 CFR Part 217 Administrative practice and procedure, Banks, Banking, Capital, Federal Reserve System, Holding companies. 12 CFR Part 252 Administrative practice and procedure, Banks, banking, Credit, Federal Reserve System, Holding companies, Investments, Qualified financial contracts, Reporting and recordkeeping requirements, Securities. 12 CFR Part 324 Administrative practice and procedure, Banks, banking, Capital 69 5 U.S.C. 801 et seq. U.S.C. 801(a)(3). 71 5 U.S.C. 804(2). 70 5 Frm 00018 Fmt 4701 Office of the Comptroller of the Currency For the reasons set out in the joint preamble, the OCC amends 12 CFR part 3 as follows. PART 3—CAPITAL ADEQUACY STANDARDS 1. The authority citation for part 3 continues to read as follows: ■ Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, 5412(b)(2)(B), and Pub. L. 116–136, 134 Stat. 281. 2. In § 3.2: a. Add definitions in alphabetical order for ‘‘Covered debt instrument’’ and ‘‘Excluded covered debt instrument’’; ■ b. In the definition of ‘‘Fiduciary or custodial and safekeeping accounts’’, remove ‘‘§ 3.10(c)(4)(ii)(J)’’ and add ‘‘§ 3.10(c)(2)(x)’’ in its place; ■ c. Revise the definition of ‘‘Indirect exposure’’; ■ d. Add a definition in alphabetical order for ‘‘Investment in a covered debt instrument’’; ■ e. Revise the definition of ‘‘Synthetic exposure’’; and ■ f. In the definition of ‘‘Total leverage exposure’’, remove ‘‘§ 3.10(c)(4)(ii)’’ and add ‘‘§ 3.10(c)(2)’’ in its place. The additions and revisions read as follows: ■ ■ § 3.2 Definitions. * 12 CFR Part 3 Administrative practice and procedure, Capital, National banks, Risk. PO 00000 adequacy, Reporting and recordkeeping requirements, Savings associations, State non-member banks. Sfmt 4700 * * * * Covered debt instrument means an unsecured debt instrument that is: (1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations (i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 3.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means an investment in a covered debt instrument held by a national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, that: (1) Is held in connection with market making-related activities permitted under 12 CFR 44.4, provided that a direct exposure or an indirect exposure to a covered debt instrument is held for 30 business days or less; and (2) Has been designated as an excluded covered debt instrument by the national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, pursuant to 12 CFR 3.22(c)(5)(iv)(A). * * * * * Indirect exposure means an exposure that arises from the national bank’s or Federal savings association’s investment in an investment fund which holds an investment in the national bank’s or VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 Federal savings association’s own capital instrument, or an investment in the capital of an unconsolidated financial institution. For an advanced approaches national bank or Federal savings association, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means a national bank’s or Federal savings association’s net long position calculated in accordance with § 3.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the national bank or Federal savings association for five or fewer business days. * * * * * Synthetic exposure means an exposure whose value is linked to the value of an investment in the national bank or Federal savings association’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches national bank or Federal savings association, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * 3. Section 3.10 is amended by: a. Revising paragraph (c); ■ b. Redesignating paragraph (d) as (e); and ■ c. Adding new paragraph (d). The revision and addition read as follows: ■ ■ § 3.10 Minimum capital requirements. * * * * * (c) Supplementary leverage ratio. (1) A Category III national bank or Federal savings association or advanced approaches national bank or Federal savings association must determine its supplementary leverage ratio in accordance with this paragraph, beginning with the calendar quarter immediately following the quarter in which the national bank or Federal savings association is identified as a Category III national bank or Federal savings association. An advanced approaches national bank’s or Federal savings association’s or a Category III national bank’s or Federal savings association’s supplementary leverage ratio is the ratio of its tier 1 capital to total leverage exposure, the latter of which is calculated as the sum of: PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 725 (i) The mean of the on-balance sheet assets calculated as of each day of the reporting quarter; and (ii) The mean of the off-balance sheet exposures calculated as of the last day of each of the most recent three months, minus the applicable deductions under § 3.22(a), (c), and (d). (2) For purposes of this part, total leverage exposure means the sum of the items described in paragraphs (c)(2)(i) through (viii) of this section, as adjusted pursuant to paragraph (c)(2)(ix) of this section for a clearing member national bank and Federal savings association and paragraph (c)(2)(x) of this section for a custody bank: (i) The balance sheet carrying value of all of the national bank or Federal savings association’s on-balance sheet assets, plus the value of securities sold under a repurchase transaction or a securities lending transaction that qualifies for sales treatment under GAAP, less amounts deducted from tier 1 capital under § 3.22(a), (c), and (d), and less the value of securities received in security-for-security repo-style transactions, where the national bank or Federal savings association acts as a securities lender and includes the securities received in its on-balance sheet assets but has not sold or rehypothecated the securities received, and, for a national bank or Federal savings association that uses the standardized approach for counterparty credit risk under § 3.132(c) for its standardized risk-weighted assets, less the fair value of any derivative contracts; (ii)(A) For a national bank or Federal savings association that uses the current exposure methodology under § 3.34(b) for its standardized risk-weighted assets, the potential future credit exposure (PFE) for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the national bank or Federal savings association, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), to which the national bank or Federal savings association is a counterparty as determined under § 3.34, but without regard to § 3.34(c), provided that: (1) A national bank or Federal savings association may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 3.34, but E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 726 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations without regard to § 3.34(c), provided that it does not adjust the net-to-gross ratio (NGR); and (2) A national bank or Federal savings association that chooses to exclude the PFE of credit derivatives or other similar instruments through which it provides credit protection pursuant to this paragraph (c)(2)(ii)(A) must do so consistently over time for the calculation of the PFE for all such instruments; or (B)(1) For a national bank or Federal savings association that uses the standardized approach for counterparty credit risk under section § 3.132(c) for its standardized risk-weighted assets, the PFE for each netting set to which the national bank or Federal savings association is a counterparty (including cleared transactions except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the national bank or Federal savings association, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), as determined under § 3.132(c)(7), in which the term C in § 3.132(c)(7)(i) equals zero, and, for any counterparty that is not a commercial end-user, multiplied by 1.4. For purposes of this paragraph (c)(2)(ii)(B)(1), a national bank or Federal savings association may set the value of the term C in § 3.132(c)(7)(i) equal to the amount of collateral posted by a clearing member client of the national bank or Federal savings association in connection with the client-facing derivative transactions within the netting set; and (2) A national bank or Federal savings association may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 3.132(c), provided that it does so consistently over time for the calculation of the PFE for all such instruments; (iii)(A)(1) For a national bank or Federal savings association that uses the current exposure methodology under § 3.34(b) for its standardized riskweighted assets, the amount of cash collateral that is received from a counterparty to a derivative contract and that has offset the mark-to-fair value of the derivative asset, or cash collateral that is posted to a counterparty to a derivative contract and that has reduced the national bank or Federal savings association’s on-balance sheet assets, unless such cash collateral is all or part of variation margin that satisfies the VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (2) The variation margin is used to reduce the current credit exposure of the derivative contract, calculated as described in § 3.34(b), and not the PFE; and (3) For the purpose of the calculation of the NGR described in § 3.34(b)(2)(ii)(B), variation margin described in paragraph (c)(2)(iii)(A)(2) of this section may not reduce the net current credit exposure or the gross current credit exposure; or (B)(1) For a national bank or Federal savings association that uses the standardized approach for counterparty credit risk under § 3.132(c) for its standardized risk-weighted assets, the replacement cost of each derivative contract or single product netting set of derivative contracts to which the national bank or Federal savings association is a counterparty, calculated according to the following formula, and, for any counterparty that is not a commercial end-user, multiplied by 1.4: Replacement Cost = max{V¥CVMr + CVMp;0} Where: V equals the fair value for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the national bank or Federal savings association, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP); CVMr equals the amount of cash collateral received from a counterparty to a derivative contract and that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction, the amount of collateral received from the clearing member client; and CVMp equals the amount of cash collateral that is posted to a counterparty to a derivative contract and that has not offset the fair value of the derivative contract and that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction, the amount of collateral posted to the clearing member client; (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, where multiple netting sets are subject to a single variation margin agreement, a national bank or Federal savings association must apply the formula for replacement cost provided in § 3.132(c)(10)(i), in which the term CMA may only include cash collateral that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (3) For purposes of paragraph (c)(2)(iii)(B)(1), a national bank or Federal savings association must treat a derivative PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 contract that references an index as if it were multiple derivative contracts each referencing one component of the index if the national bank or Federal savings association elected to treat the derivative contract as multiple derivative contracts under § 3.132(c)(5)(vi); (C) For derivative contracts that are not cleared through a QCCP, the cash collateral received by the recipient counterparty is not segregated (by law, regulation, or an agreement with the counterparty); (D) Variation margin is calculated and transferred on a daily basis based on the mark-to-fair value of the derivative contract; (E) The variation margin transferred under the derivative contract or the governing rules of the CCP or QCCP for a cleared transaction is the full amount that is necessary to fully extinguish the net current credit exposure to the counterparty of the derivative contracts, subject to the threshold and minimum transfer amounts applicable to the counterparty under the terms of the derivative contract or the governing rules for a cleared transaction; (F) The variation margin is in the form of cash in the same currency as the currency of settlement set forth in the derivative contract, provided that for the purposes of this paragraph (c)(2)(iii)(F), currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement and the credit support annex to the qualifying master netting agreement, or in the governing rules for a cleared transaction; and (G) The derivative contract and the variation margin are governed by a qualifying master netting agreement between the legal entities that are the counterparties to the derivative contract or by the governing rules for a cleared transaction, and the qualifying master netting agreement or the governing rules for a cleared transaction must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided under the contract if a credit event involving either counterparty occurs; (iv) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the national bank or Federal savings association provides credit protection, provided that: (A) The national bank or Federal savings association may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-tofair value of the credit derivative if the reduction is recognized in common equity tier 1 capital; (B) The national bank or Federal savings association may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the national bank or Federal savings E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations association provides credit protection and that: (1) With respect to a credit derivative that references a single exposure, the reference exposure of the purchased credit derivative is to the same legal entity and ranks pari passu with, or is junior to, the reference exposure of the credit derivative through which the national bank or Federal savings association provides credit protection; or (2) With respect to a credit derivative that references multiple exposures, the reference exposures of the purchased credit derivative are to the same legal entities and rank pari passu with the reference exposures of the credit derivative through which the national bank or Federal savings association provides credit protection, and the level of seniority of the purchased credit derivative ranks pari passu to the level of seniority of the credit derivative through which the national bank or Federal savings association provides credit protection; (3) Where a national bank or Federal savings association has reduced the effective notional amount of a credit derivative through which the national bank or Federal savings association provides credit protection in accordance with paragraph (c)(2)(iv)(A) of this section, the national bank or Federal savings association must also reduce the effective notional principal amount of a purchased credit derivative used to offset the credit derivative through which the national bank or Federal savings association provides credit protection, by the amount of any increase in the mark-to-fair value of the purchased credit derivative that is recognized in common equity tier 1 capital; and (4) Where the national bank or Federal savings association purchases credit protection through a total return swap and records the net payments received on a credit derivative through which the national bank or Federal savings association provides credit protection in net income, but does not record offsetting deterioration in the mark-to-fair value of the credit derivative through which the national bank or Federal savings association provides credit protection in net income (either through reductions in fair value or by additions to reserves), the national bank or Federal savings association may not use the purchased credit protection to offset the effective notional principal amount of the related credit derivative through which the national bank or Federal savings association provides credit protection; (v) Where a national bank or Federal savings association acting as a principal has more than one repo-style transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less any onbalance sheet receivables amount associated with these repo-style transactions included under paragraph (c)(2)(i) of this section, unless the following criteria are met: (A) The offsetting transactions have the same explicit final settlement date under their governing agreements; VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 (B) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and (C) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement; (vi) The counterparty credit risk of a repostyle transaction, including where the national bank or Federal savings association acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer’s counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows: (A) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i is treated as its own netting set, in accordance with the following formula, where Ei is the fair value of the instruments, gold, or cash that the national bank or Federal savings association has lent, sold subject to repurchase, or provided as collateral to the counterparty, and Ci is the fair value of the instruments, gold, or cash that the national bank or Federal savings association has borrowed, purchased subject to resale, or received as collateral from the counterparty: Ei* = max {0, [Ei ¥ Ci]}; and (B) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total fair value of the instruments, gold, or cash that the national bank or Federal savings association has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (SEi), less the total fair value of the instruments, gold, or cash that the national bank or Federal savings association borrowed, purchased subject to resale or received as collateral from the counterparty for those transactions (SCi), in accordance with the following formula: E* = max {0, [SEi ¥ SCi]} (vii) If a national bank or Federal savings association acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer’s counterparty and the guarantee is not limited to the difference between the fair value of the PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 727 security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided; (viii) The credit equivalent amount of all off-balance sheet exposures of the national bank or Federal savings association, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 3.33(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and (ix) For a national bank or Federal savings association that is a clearing member: (A) A clearing member national bank or Federal savings association that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure; (B) A clearing member national bank or Federal savings association that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure; (C) A clearing member national bank or Federal savings association that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure; (D) A national bank or Federal savings association that is a clearing member may exclude from its total leverage exposure the effective notional principal amount of credit protection sold through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (c)(2)(iv) of this section; and (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this section, a national bank or Federal savings association may exclude from its total leverage exposure a clearing member’s exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the national bank’s or Federal savings association’s balance sheet. (x) A custodial bank shall exclude from its total leverage exposure the lesser of: (A) The amount of funds that the custody bank has on deposit at a qualifying central bank; and (B) The amount of funds that the custody bank’s clients have on deposit at the custody bank that are linked to fiduciary or custodial and safekeeping accounts. For purposes of this paragraph (c)(2)(x), a deposit account is linked to a fiduciary or custodial and safekeeping account if the deposit account is provided to a client that maintains a E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 728 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations fiduciary or custodial and safekeeping account with the custody bank, and the deposit account is used to facilitate the administration of the fiduciary or custody and safekeeping account. (d) Advanced approaches capital ratio calculations. An advanced approaches national bank or Federal savings association that has completed the parallel run process and received notification from the OCC pursuant to § 3.121(d) must determine its regulatory capital ratios as described in paragraphs (d)(1) through (3) of this section. (1) Common equity tier 1 capital ratio. The national bank’s or Federal savings association’s common equity tier 1 capital ratio is the lower of: (i) The ratio of the national bank’s or Federal savings association’s common equity tier 1 capital to standardized total riskweighted assets; and (ii) The ratio of the national bank’s or Federal savings association’s common equity tier 1 capital to advanced approaches total risk-weighted assets. (2) Tier 1 capital ratio. The national bank’s or Federal savings association’s tier 1 capital ratio is the lower of: (i) The ratio of the national bank’s or Federal savings association’s tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the national bank’s or Federal savings association’s tier 1 capital to advanced approaches total risk-weighted assets. (3) Total capital ratio. The national bank’s or Federal savings association’s total capital ratio is the lower of: (i) The ratio of the national bank’s or Federal savings association’s total capital to standardized total risk-weighted assets; and (ii) The ratio of the national bank’s or Federal savings association’s advancedapproaches-adjusted total capital to advanced approaches total risk-weighted assets. A national bank’s or Federal savings association’s advanced-approaches-adjusted total capital is the national bank’s or Federal savings association’s total capital after being adjusted as follows: (A) An advanced approaches national bank or Federal savings association must deduct from its total capital any allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, included in its tier 2 capital in accordance with § 3.20(d)(3); and (B) An advanced approaches national bank or Federal savings association must add to its total capital any eligible credit reserves that exceed the national bank’s or Federal savings association’s total expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the national bank’s or Federal savings association’s credit risk-weighted assets. (4) Federal savings association tangible capital ratio. A Federal savings association’s tangible capital ratio is the ratio of the Federal savings association’s core capital (tier 1 capital) to average total assets as calculated under this subpart B. For purposes of this paragraph (d)(4), the term ‘‘total assets’’ means ‘‘total assets’’ as defined in part 6, subpart A of this chapter, subject to subpart G of this part. * * * VerDate Sep<11>2014 * * 19:58 Jan 05, 2021 Jkt 253001 4. In § 3.22, revise paragraphs (c), (f), and (h) to read as follows: ■ § 3.22 Regulatory capital adjustments and deductions. * * * * * (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the national bank’s or Federal savings association’s own capital instruments. A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own capital instruments, as follows: (i) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 3.20(b)(1); (ii) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own additional tier 1 capital instruments from its additional tier 1 capital elements; and (iii) A national bank or Federal savings association must deduct an investment in the national bank’s or Federal savings association’s own tier 2 capital instruments from its tier 2 capital elements. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), investments in the capital of unconsolidated financial institutions for a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association (as described in paragraph (c)(4) of this section), nonsignificant investments in the capital of unconsolidated financial institutions for an advanced approaches national bank or Federal savings association (as described in paragraph (c)(5) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions for an advanced approaches national bank or Federal savings association (as described in paragraph (c)(6) of this section). Under the corresponding 23 The national bank or Federal savings association must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under § 3.20(d)(3). PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 deduction approach, a national bank or Federal savings association must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the national bank or Federal savings association itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the national bank or Federal savings association does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 3.20, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches national bank or Federal savings association, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 3.300(c)), the national bank or Federal savings association must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 (B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross holdings in the capital of financial institutions. (i) A national bank or Federal savings association must deduct an investment in the capital of other financial institutions that it holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches national bank or Federal savings association must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Investments in the capital of unconsolidated financial institutions. A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must deduct its investments in the capital of unconsolidated financial institutions (as defined in § 3.2) that exceed 25 percent of the sum of the national bank or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, a national bank or Federal savings association that underwrites a failed underwriting, for the period of time stipulated by the OCC, is not required to deduct an investment in the capital of an 24 With the prior written approval of the OCC, for the period of time stipulated by the OCC, a national bank or Federal savings association is not required to deduct a non-significant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 unconsolidated financial institution pursuant to this paragraph (c) to the extent the investment is related to the failed underwriting.25 (5) Non-significant investments in the capital of unconsolidated financial institutions. (i) An advanced approaches national bank or Federal savings association must deduct its nonsignificant investments in the capital of unconsolidated financial institutions (as defined in § 3.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 3.2) issued by a financial institution in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 3.2), exceeds 10 percent of the sum of the advanced approaches national bank’s or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, an advanced approaches national bank or Federal savings association that underwrites a failed underwriting, for the period of time stipulated by the OCC, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(5) to the extent the investment is related to the failed underwriting.27 For any calculation 25 Any non-significant investments in the capital of an unconsolidated financial institution that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. 26 With the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches a national bank or Federal savings association is not required to deduct a nonsignificant investment in the capital instrument of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the OCC. 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(4) or otherwise under this section must be assigned the appropriate risk weight under subpart D, E, or F of this part, as applicable. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 729 under this paragraph (c)(5)(i), an advanced approaches national bank or Federal savings association may exclude the amount of an investment in a covered debt instrument under paragraph (c)(5)(iii) or (iv) of this section, as applicable. (ii) For an advanced approaches national bank or Federal savings association, the amount to be deducted under this paragraph (c)(5) from a specific capital component is equal to: (A) The advanced approaches national bank’s or Federal savings association’s aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(5), exceeding the 10 percent threshold for non-significant investments, multiplied by (B) The ratio of the advanced approaches national bank’s or Federal savings association’s aggregate nonsignificant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the national bank’s or Federal savings association’s total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iii) For purposes of applying the deduction under paragraph (c)(5)(i) of this section, an advanced approaches national bank or Federal savings association that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may exclude from the deduction the amount of the national bank’s or Federal savings association’s gross long position, in accordance with § 3.22(h)(2), in investments in covered debt instruments issued by financial institutions in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institutions up to an amount equal to 5 percent of the sum of the national bank’s or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (iv) Prior to applying the deduction under paragraph (c)(5)(i) of this section: (A) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, may designate E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 730 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 3.2. (B) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section, its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, but no longer qualifies as an excluded covered debt instrument. (C) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section the amount of its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a direct or indirect investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, and has been held for more than thirty business days. (D) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section its gross long position, calculated in accordance with paragraph (h)(2) of this section, of its aggregate investment in excluded covered debt instruments that exceeds 5 percent of the sum of the national bank’s or Federal savings association’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (6) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. If an advanced approaches national bank or Federal savings association has a significant investment in the capital of an unconsolidated financial institution, the advanced approaches national bank or Federal savings association must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the national bank or Federal savings association other than an investment in the form of VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 common stock, as well as any investment in a covered debt instrument issued by the unconsolidated financial institution, by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association that underwrites a failed underwriting is not required to deduct the significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(6) if such investment is related to such failed underwriting. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a national bank or Federal savings association does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the national bank or Federal savings association must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches national bank or Federal savings association in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph. Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 3.12) that has elected to use the community bank leverage ratio framework pursuant to § 3.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * (h) Net long position—(1) In general. For purposes of calculating the amount of a national bank’s or Federal savings association’s investment in the national bank’s or Federal savings association’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in 28 With prior written approval of the OCC, for the period of time stipulated by the OCC, an advanced approaches national bank or Federal savings association is not required to deduct an investment in a covered debt instrument under this paragraph (c)(5) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the OCC. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 a covered debt instrument under this section, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the national bank or Federal savings association in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the national bank or Federal savings association, the adjusted carrying value of the exposure as that term is defined in § 3.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 3.2; (iii) For each indirect exposure, the national bank’s or Federal savings association’s carrying value of its investment in an investment fund or, alternatively: (A) A national bank or Federal savings association may, with the prior approval of the OCC, use a conservative estimate of the amount of its indirect investment in the national bank’s or Federal savings association’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) A national bank or Federal savings association may calculate the gross long position for an indirect exposure to the national bank’s or Federal savings association’s own capital the capital in an unconsolidated financial institution, or a covered debt instrument by multiplying the national bank’s or Federal savings association’s carrying value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in the national bank’s or Federal savings association’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings (in percent) of the investment in the national bank’s or Federal savings association’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in a covered debt instrument, as applicable; and E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations (iv) For a synthetic exposure, the amount of the national bank’s or Federal savings association’s loss on the exposure if the reference capital instrument or covered debt instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the national bank’s or Federal savings association’s Call Report, if the national bank or Federal savings association has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the national bank or Federal savings association exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in a national bank’s or Federal savings association’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section: (A) The national bank or Federal savings association may only net a short position against a long position in an investment in the national bank’s or Federal savings association’s own capital instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the national bank’s or Federal savings association’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the national bank’s or Federal savings association’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the national bank’s or Federal savings association’s Call Report, and the hedge is deemed effective by the national bank’s or Federal savings association’s internal control processes, which have not been found to be inadequate by the OCC. § 3.121 [Amended] 5. Section 3.121 is amended by removing ‘‘§ 3.10(c)(1) through (3)’’ and adding ‘‘§ 3.10(d)(1) through (3)’’ in its place in paragraph (c). ■ § 3.132 [Amended] 6. Section 3.132 is amended by removing ‘‘§ 3.10(c)(4)(ii)(B)’’ and adding ‘‘§ 3.10(c)(2)(ii)(B)’’ in paragraphs (c)(7)(iii) and (iv). ■ § 3.304 [Amended] 7. Section 3.304 is amended by: a. Removing ‘‘§ 3.10(c)(4)’’ and adding in its place ‘‘§ 3.10(d)’’ in paragraph (a) introductory text; and ■ b. Removing ‘‘§ 3.10(c)(4)(ii)(J)(1)’’ and adding in its place ‘‘§ 3.10(c)(2)(x)(A)’’ in paragraph (e). ■ ■ Board of Governors of the Federal Reserve System For the reasons set forth in the joint preamble, the Board amends part 217 of chapter II of title 12 of the Code of Federal Regulations as follows: PART 217—CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q). 8. The authority citation for part 217 continues to read as follows: ■ Authority: 12 U.S.C. 248(a), 321–338a, 481–486, 1462a, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1851, 3904, 3906–3909, 4808, 5365, 5368, 5371, and 5371 note; Pub. L. 116–136, 134 Stat. 281. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 731 9. In § 217.2: a. Add definitions in alphabetical order for ‘‘Covered debt instrument’’ and ‘‘Excluded covered debt instrument’’; ■ b. In the definition of ‘‘Fiduciary or custodial and safekeeping accounts’’, remove ‘‘§ 217.10(c)(4)(ii)(J)’’ and add ‘‘§ 217.10(c)(2)(x)’’ in its place; ■ c. Revise the definition of ‘‘Indirect exposure’’; ■ d. Add a definition in alphabetical order for ‘‘Investment in a covered debt instrument’’; ■ e. Revise the definition of ‘‘Synthetic exposure’’; and ■ f. In the definition of ‘‘Total leverage exposure’’, remove ‘‘§ 217.10(c)(4)(ii)’’ and add ‘‘§ 217.10(c)(2)’’ in its place. The additions and revisions read as follows: ■ ■ § 217.2 Definitions. * * * * * Covered debt instrument means an unsecured debt instrument that is: (1) Issued by a global systemically important BHC and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where, (i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 732 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means an investment in a covered debt instrument held by a global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC that: (1) Is held in connection with market making-related activities permitted under 12 CFR 248.4, provided that a direct exposure or an indirect exposure to a covered debt instrument is held for 30 business days or less; and (2) Has been designated as an excluded covered debt instrument by the global systemically important BHC or the subsidiary of a global systemically important BHC pursuant to 12 CFR 217.22(c)(5)(iv)(A). * * * * * Indirect exposure means an exposure that arises from the Board-regulated institution’s investment in an investment fund which holds an investment in the Board-regulated institution’s own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches Boardregulated institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means a Board-regulated institution’s net long position calculated in accordance with § 217.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the Board-regulated institution for five or fewer business days. * * * * * VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 Synthetic exposure means an exposure whose value is linked to the value of an investment in the Boardregulated institution’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches Boardregulated institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * ■ 10. Section 217.10 is amended by: ■ a. Revising paragraph (c); ■ b. Redesignating paragraph (d) as (e); and ■ c. Adding new paragraph (d). The revision and addition read as follows: § 217.10 Minimum capital requirements. * * * * * (c) Supplementary leverage ratio. (1) A Category III Board-regulated institution or advanced approaches Board-regulated institution must determine its supplementary leverage ratio in accordance with this paragraph, beginning with the calendar quarter immediately following the quarter in which the Board-regulated institution is identified as a Category III Boardregulated institution. An advanced approaches Board-regulated institution’s or a Category III Board-regulated institution’s supplementary leverage ratio is the ratio of its tier 1 capital to total leverage exposure, the latter of which is calculated as the sum of: (i) The mean of the on-balance sheet assets calculated as of each day of the reporting quarter; and (ii) The mean of the off-balance sheet exposures calculated as of the last day of each of the most recent three months, minus the applicable deductions under § 217.22(a), (c), and (d). (2) For purposes of this part, total leverage exposure means the sum of the items described in paragraphs (c)(2)(i) through (viii) of this section, as adjusted pursuant to paragraph (c)(2)(ix) of this section for a clearing member Boardregulated institution and paragraph (c)(2)(x) of this section for a custodial banking organization: (i) The balance sheet carrying value of all of the Board-regulated institution’s on-balance sheet assets, plus the value of securities sold under a repurchase transaction or a securities lending transaction that qualifies for sales treatment under GAAP, less amounts deducted from tier 1 capital under § 217.22(a), (c), and (d), and less the value of securities received in securityfor-security repo-style transactions, PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 where the Board-regulated institution acts as a securities lender and includes the securities received in its on-balance sheet assets but has not sold or rehypothecated the securities received, and, for a Board-regulated institution that uses the standardized approach for counterparty credit risk under § 217.132(c) for its standardized riskweighted assets, less the fair value of any derivative contracts; (ii)(A) For a Board-regulated institution that uses the current exposure methodology under § 217.34(b) for its standardized riskweighted assets, the potential future credit exposure (PFE) for each derivative contract or each singleproduct netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), to which the Board-regulated institution is a counterparty as determined under § 217.34, but without regard to § 217.34(c), provided that: (1) A Board-regulated institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 217.34, but without regard to § 217.34(c), provided that it does not adjust the net-to-gross ratio (NGR); and (2) A Board-regulated institution that chooses to exclude the PFE of credit derivatives or other similar instruments through which it provides credit protection pursuant to paragraph (c)(2)(ii)(A) of this section must do so consistently over time for the calculation of the PFE for all such instruments; or (B)(1) For a Board-regulated institution that uses the standardized approach for counterparty credit risk under section § 217.132(c) for its standardized risk-weighted assets, the PFE for each netting set to which the Board-regulated institution is a counterparty (including cleared transactions except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), as determined under § 217.132(c)(7), in which the term C in E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations § 217.132(c)(7)(i) equals zero, and, for any counterparty that is not a commercial end-user, multiplied by 1.4. For purposes of this paragraph (c)(2)(ii)(B)(1), a Board-regulated institution may set the value of the term C in § 217.132(c)(7)(i) equal to the amount of collateral posted by a clearing member client of the Board-regulated institution in connection with the client-facing derivative transactions within the netting set; and (2) A Board-regulated institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 217.132(c), provided that it does so consistently over time for the calculation of the PFE for all such instruments; (iii)(A)(1) For a Board-regulated institution that uses the current exposure methodology under § 217.34(b) for its standardized riskweighted assets, the amount of cash collateral that is received from a counterparty to a derivative contract and that has offset the mark-to-fair value of the derivative asset, or cash collateral that is posted to a counterparty to a derivative contract and that has reduced the Board-regulated institution’s onbalance sheet assets, unless such cash collateral is all or part of variation margin that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (2) The variation margin is used to reduce the current credit exposure of the derivative contract, calculated as described in § 217.34(b), and not the PFE; and (3) For the purpose of the calculation of the NGR described in § 217.34(b)(2)(ii)(B), variation margin described in paragraph (c)(2)(iii)(A)(2) of this section may not reduce the net current credit exposure or the gross current credit exposure; or (B)(1) For a Board-regulated institution that uses the standardized approach for counterparty credit risk under § 217.132(c) for its standardized risk-weighted assets, the replacement cost of each derivative contract or single product netting set of derivative contracts to which the Board-regulated institution is a counterparty, calculated according to the following formula, and, for any counterparty that is not a commercial end-user, multiplied by 1.4: Replacement Cost = max{V¥CVMr + CVMp;0} Where: V equals the fair value for each derivative contract or each single-product netting set of derivative contracts (including a cleared VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the Board-regulated institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP); CVMr equals the amount of cash collateral received from a counterparty to a derivative contract and that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction, the amount of collateral received from the clearing member client; and CVMp equals the amount of cash collateral that is posted to a counterparty to a derivative contract and that has not offset the fair value of the derivative contract and that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction, the amount of collateral posted to the clearing member client; (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, where multiple netting sets are subject to a single variation margin agreement, a Board-regulated institution must apply the formula for replacement cost provided in § 217.132(c)(10)(i), in which the term CMA may only include cash collateral that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (3) For purposes of paragraph (c)(2)(iii)(B)(1), a Board-regulated institution must treat a derivative contract that references an index as if it were multiple derivative contracts each referencing one component of the index if the Boardregulated institution elected to treat the derivative contract as multiple derivative contracts under § 217.132(c)(5)(vi); (C) For derivative contracts that are not cleared through a QCCP, the cash collateral received by the recipient counterparty is not segregated (by law, regulation, or an agreement with the counterparty); (D) Variation margin is calculated and transferred on a daily basis based on the mark-to-fair value of the derivative contract; (E) The variation margin transferred under the derivative contract or the governing rules of the CCP or QCCP for a cleared transaction is the full amount that is necessary to fully extinguish the net current credit exposure to the counterparty of the derivative contracts, subject to the threshold and minimum transfer amounts applicable to the counterparty under the terms of the derivative contract or the governing rules for a cleared transaction; (F) The variation margin is in the form of cash in the same currency as the currency of settlement set forth in the derivative contract, provided that for the purposes of this paragraph (c)(2)(iii)(F), currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement and the credit support annex to the qualifying master netting agreement, or in the governing rules for a cleared transaction; and (G) The derivative contract and the variation margin are governed by a qualifying PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 733 master netting agreement between the legal entities that are the counterparties to the derivative contract or by the governing rules for a cleared transaction, and the qualifying master netting agreement or the governing rules for a cleared transaction must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided under the contract if a credit event involving either counterparty occurs; (iv) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the Board-regulated institution provides credit protection, provided that: (A) The Board-regulated institution may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-to-fair value of the credit derivative if the reduction is recognized in common equity tier 1 capital; (B) The Board-regulated institution may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the Board-regulated institution provides credit protection and that: (1) With respect to a credit derivative that references a single exposure, the reference exposure of the purchased credit derivative is to the same legal entity and ranks pari passu with, or is junior to, the reference exposure of the credit derivative through which the Board-regulated institution provides credit protection; or (2) With respect to a credit derivative that references multiple exposures, the reference exposures of the purchased credit derivative are to the same legal entities and rank pari passu with the reference exposures of the credit derivative through which the Boardregulated institution provides credit protection, and the level of seniority of the purchased credit derivative ranks pari passu to the level of seniority of the credit derivative through which the Board-regulated institution provides credit protection; (3) Where a Board-regulated institution has reduced the effective notional amount of a credit derivative through which the Boardregulated institution provides credit protection in accordance with paragraph (c)(2)(iv)(A) of this section, the Boardregulated institution must also reduce the effective notional principal amount of a purchased credit derivative used to offset the credit derivative through which the Boardregulated institution provides credit protection, by the amount of any increase in the mark-to-fair value of the purchased credit derivative that is recognized in common equity tier 1 capital; and (4) Where the Board-regulated institution purchases credit protection through a total return swap and records the net payments E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 734 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations received on a credit derivative through which the Board-regulated institution provides credit protection in net income, but does not record offsetting deterioration in the mark-tofair value of the credit derivative through which the Board-regulated institution provides credit protection in net income (either through reductions in fair value or by additions to reserves), the Board-regulated institution may not use the purchased credit protection to offset the effective notional principal amount of the related credit derivative through which the Board-regulated institution provides credit protection; (v) Where a Board-regulated institution acting as a principal has more than one repostyle transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less any on-balance sheet receivables amount associated with these repo-style transactions included under paragraph (c)(2)(i) of this section, unless the following criteria are met: (A) The offsetting transactions have the same explicit final settlement date under their governing agreements; (B) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and (C) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement; (vi) The counterparty credit risk of a repostyle transaction, including where the Boardregulated institution acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer’s counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows: (A) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i is treated as its own netting set, in accordance with the following formula, where Ei is the fair value of the instruments, gold, or cash that the Boardregulated institution has lent, sold subject to repurchase, or provided as collateral to the counterparty, and Ci is the fair value of the instruments, gold, or cash that the Boardregulated institution has borrowed, VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 purchased subject to resale, or received as collateral from the counterparty: Ei* = max {0, [Ei ¥ Ci]}; and (B) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total fair value of the instruments, gold, or cash that the Board-regulated institution has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (SEi), less the total fair value of the instruments, gold, or cash that the Board-regulated institution borrowed, purchased subject to resale or received as collateral from the counterparty for those transactions (SCi), in accordance with the following formula: E* = max {0, [SEi ¥ SCi]} (vii) If a Board-regulated institution acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer’s counterparty and the guarantee is not limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided; (viii) The credit equivalent amount of all off-balance sheet exposures of the Boardregulated institution, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 217.33(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and (ix) For a Board-regulated institution that is a clearing member: (A) A clearing member Board-regulated institution that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure; (B) A clearing member Board-regulated institution that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure; (C) A clearing member Board-regulated institution that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure; (D) A Board-regulated institution that is a clearing member may exclude from its total leverage exposure the effective notional principal amount of credit protection sold PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (c)(2)(iv) of this section; and (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this section, a Board-regulated institution may exclude from its total leverage exposure a clearing member’s exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the Board-regulated institution’s balance sheet. (x) A custodial banking organization shall exclude from its total leverage exposure the lesser of: (A) The amount of funds that the custodial banking organization has on deposit at a qualifying central bank; and (B) The amount of funds in deposit accounts at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts at the custodial banking organization. For purposes of this paragraph (c)(2)(x), a deposit account is linked to a fiduciary or custodial and safekeeping account if the deposit account is provided to a client that maintains a fiduciary or custodial and safekeeping account with the custodial banking organization, and the deposit account is used to facilitate the administration of the fiduciary or custodial and safekeeping account. (d) Advanced approaches capital ratio calculations. An advanced approaches Board-regulated institution that has completed the parallel run process and received notification from the Board pursuant to § 217.121(d) must determine its regulatory capital ratios as described in paragraphs (d)(1) through (3) of this section. (1) Common equity tier 1 capital ratio. The Board-regulated institution’s common equity tier 1 capital ratio is the lower of: (i) The ratio of the Board-regulated institution’s common equity tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the Board-regulated institution’s common equity tier 1 capital to advanced approaches total risk-weighted assets. (2) Tier 1 capital ratio. The Boardregulated institution’s tier 1 capital ratio is the lower of: (i) The ratio of the Board-regulated institution’s tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the Board-regulated institution’s tier 1 capital to advanced approaches total risk-weighted assets. (3) Total capital ratio. The Board-regulated institution’s total capital ratio is the lower of: (i) The ratio of the Board-regulated institution’s total capital to standardized total risk-weighted assets; and (ii) The ratio of the Board-regulated institution’s advanced-approaches-adjusted total capital to advanced approaches total risk-weighted assets. A Board-regulated institution’s advanced-approaches-adjusted total capital is the Board-regulated institution’s total capital after being adjusted as follows: E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations (A) An advanced approaches Boardregulated institution must deduct from its total capital any allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, included in its tier 2 capital in accordance with § 217.20(d)(3); and (B) An advanced approaches Boardregulated institution must add to its total capital any eligible credit reserves that exceed the Board-regulated institution’s total expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the Board-regulated institution’s credit risk-weighted assets. * * * * * 11. In § 217.22, revise paragraphs (c), (f) and (h) to read as follows: ■ § 217.22 Regulatory capital adjustments and deductions. * * * * * (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the Board-regulated institution’s own capital or covered debt instruments. A Board-regulated institution must deduct an investment in the Board-regulated institution’s own capital instruments, and an advanced approaches Boardregulated institution also must deduct an investment in the Board-regulated institution’s own covered debt instruments, as follows: jbell on DSKJLSW7X2PROD with RULES2 23 The Board-regulated institution must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under § 217.20(d)(3). (i) A Board-regulated institution must deduct an investment in the Boardregulated institution’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 217.20(b)(1); (ii) A Board-regulated institution must deduct an investment in the Boardregulated institution’s own additional tier 1 capital instruments from its additional tier 1 capital elements; (iii) A Board-regulated institution must deduct an investment in the Board-regulated institution’s own tier 2 capital instruments from its tier 2 capital elements; and (iv) An advanced approaches Boardregulated institution must deduct an investment in the institution’s own covered debt instruments from its tier 2 capital elements, as applicable. If the advanced approaches Board-regulated institution does not have a sufficient amount of tier 2 capital to effect this deduction, the institution must deduct the shortfall amount from the next VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 higher (that is, more subordinated) component of regulatory capital. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), investments in the capital of unconsolidated financial institutions for a Board-regulated institution that is not an advanced approaches Boardregulated institution (as described in paragraph (c)(4) of this section), nonsignificant investments in the capital of unconsolidated financial institutions for an advanced approaches Boardregulated institution (as described in paragraph (c)(5) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions for an advanced approaches Boardregulated institution (as described in paragraph (c)(6) of this section). Under the corresponding deduction approach, a Board-regulated institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the Board-regulated institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the Board-regulated institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the Boardregulated institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 217.20, the Board-regulated institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 735 the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches Board-regulated institution, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 217.300(c)), the Boardregulated institution must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross holdings in the capital of financial institutions. (i) A Board-regulated institution must deduct an investment in the capital of other financial institutions that it holds reciprocally, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches Boardregulated institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Investments in the capital of unconsolidated financial institutions. A Board-regulated institution that is not an advanced approaches Boardregulated institution must deduct its investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that exceed 25 percent of the sum of the Boardregulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to E:\FR\FM\06JAR2.SGM 06JAR2 736 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, a Board-regulated institution that underwrites a failed underwriting, for the period of time stipulated by the Board, is not required to deduct an investment in the capital of an unconsolidated financial institution pursuant to this paragraph (c) to the extent the investment is related to the failed underwriting.25 jbell on DSKJLSW7X2PROD with RULES2 24 With the prior written approval of the Board, for the period of time stipulated by the Board, a Board-regulated institution that is not an advanced approaches Boardregulated institution is not required to deduct an investment in the capital of an unconsolidated financial institution pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board. 25 Any investments in the capital of unconsolidated financial institutions that do not exceed the 25 percent threshold for investments in the capital of unconsolidated financial institutions under this section must be assigned the appropriate risk weight under subparts D or F of this part, as applicable. (5) Non-significant investments in the capital of unconsolidated financial institutions. (i) An advanced approaches Board-regulated institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 217.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 217.2) issued by a financial institution in which the Boardregulated institution does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 217.2), exceeds 10 percent of the sum of the advanced approaches Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, an advanced approaches Board-regulated institution that underwrites a failed VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 underwriting, for the period of time stipulated by the Board, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(5) to the extent the investment is related to the failed underwriting.27 For any calculation under this paragraph (c)(5)(i), an advanced approaches Boardregulated institution may exclude the amount of an investment in a covered debt instrument under paragraph (c)(5)(iii) or (iv) of this section, as applicable. 26 With the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Boardregulated institution is not required to deduct a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the Board. 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(5) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. (ii) For an advanced approaches Board-regulated institution, the amount to be deducted under this paragraph (c)(5) from a specific capital component is equal to: (A) The advanced approaches Boardregulated institution’s aggregate nonsignificant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(5), exceeding the 10 percent threshold for non-significant investments, multiplied by (B) The ratio of the advanced approaches Board-regulated institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the advanced approaches Board-regulated institution’s total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iii) For purposes of applying the deduction under paragraph (c)(5)(i) of this section, an advanced approaches Board-regulated institution that is not a global systemically important BHC or a subsidiary of a global systemically important banking organization, as PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 defined in 12 CFR 252.2, may exclude from the deduction the amount of the Board-regulated institution’s gross long position, in accordance with § 217.22(h)(2), in investments in covered debt instruments issued by financial institutions in which the Board-regulated institution does not have a significant investment in the capital of the unconsolidated financial institutions up to an amount equal to 5 percent of the sum of the Boardregulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (iv) Prior to applying the deduction under paragraph (c)(5)(i) of this section: (A) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 217.2. (B) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct, according to the corresponding deduction approach in paragraph (c)(2) of this section, its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, but no longer qualifies as an excluded covered debt instrument. (C) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section the amount of its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a direct or indirect investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, and has been held for more than thirty business days. (D) A global systemically important BHC or a Board-regulated institution that is a subsidiary of a global systemically important BHC must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section its gross long position, calculated in accordance with paragraph (h)(2) of this section, of its aggregate E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations position in excluded covered debt instruments that exceeds 5 percent of the sum of the Board-regulated institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (6) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. If an advanced approaches Board-regulated institution has a significant investment in the capital of an unconsolidated financial institution, the advanced approaches Board-regulated institution must deduct from capital any such investment issued by the unconsolidated financial institution that is held by the Boardregulated institution other than an investment in the form of common stock, as well as any investment in a covered debt instrument issued by the unconsolidated financial institution, by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Boardregulated institution that underwrites a failed underwriting is not required to deduct the significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(6) if such investment is related to such failed underwriting. 28 With prior written approval of the Board, for the period of time stipulated by the Board, an advanced approaches Boardregulated institution is not required to deduct a significant investment in the capital of an unconsolidated financial institution, including an investment in a covered debt instrument, under this paragraph (c)(6) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the Board. jbell on DSKJLSW7X2PROD with RULES2 * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a Boardregulated institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the Board-regulated institution must deduct the shortfall amount from VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches Board-regulated institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph (f). Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 217.12) that has elected to use the community bank leverage ratio framework pursuant to § 217.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * (h) Net long position—(1) In general. For purposes of calculating the amount of a Board-regulated institution’s investment in the Board regulated institution’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument under this section, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the Board-regulated institution in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the Board-regulated institution, the adjusted carrying value of the exposure as that term is defined in § 217.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 217.2; (iii) For each indirect exposure, the Board-regulated institution’s carrying value of its investment in an investment fund or, alternatively: (A) A Board-regulated institution may, with the prior approval of the Board, use a conservative estimate of the amount of its indirect investment in the Board-regulated institution’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) A Board-regulated institution may calculate the gross long position for an indirect exposure to the Board-regulated institution’s own capital instruments, the capital of an unconsolidated financial institution, or a covered debt instrument by multiplying the Board- PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 737 regulated institution’s carrying value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in the Board-regulated institution’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings (in percent) of the investment in the Board-regulated institution’s own capital instruments, investment in the capital of an unconsolidated financial institution, or investment in a covered debt instrument, as applicable; and (iv) For a synthetic exposure, the amount of the Board-regulated institution’s loss on the exposure if the reference capital or covered debt instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the Board-regulated institution’s Call Report, for a state member bank, or FR Y–9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, if the Board-regulated institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the Board-regulated institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in a Boardregulated institution’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under E:\FR\FM\06JAR2.SGM 06JAR2 738 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations paragraphs (c)(1), (5), and (6) of this section: (A) The Board-regulated institution may only net a short position against a long position in an investment in the Board-regulated institution’s own capital instrument or own covered debt instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the Board-regulated institution’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the Boardregulated institution’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or offbalance sheet) on the Board-regulated institution’s Call Report, for a state member bank, or FR Y–9C, for a bank holding company, savings and loan holding company, or intermediate holding company, as applicable, and the hedge is deemed effective by the Boardregulated institution’s internal control processes, which have not been found to be inadequate by the Board. § 217.121 [Amended] 12. Section 217.121 is amended by removing ‘‘§ 217.10(c)(1) through (3)’’ and adding ‘‘§ 217.10(d)(1) through (3)’’ in paragraph (c). ■ § 217.132 [Amended] 13. Section 217.132 is amended by removing ‘‘§ 217.10(c)(4)(ii)(B)(2)’’ and adding ‘‘§ 217.10(c)(2)(ii)(B)’’ in paragraphs (c)(7)(iii) and (iv). jbell on DSKJLSW7X2PROD with RULES2 ■ § 217.303 [Amended] 14. Section 217.303 is amended by: a. Removing ‘‘§ 217.10(c)(4)’’ and adding in its place ‘‘§ 217.10(c)’’ in paragraph (a); and ■ ■ VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 b. Removing ‘‘§ 217.10(c)(4)(ii)(J)(1)’’ and adding in its place ‘‘§ 217.10(c)(2)(x)(A)’’ in paragraph (e). ■ PART 252—ENHANCED PRUDENTIAL STANDARDS (REGULATION YY) 15. The authority citation for part 252 continues to read as follows: ■ Authority: 12 U.S.C. 321–338a, 481–486, 1467a, 1818, 1828, 1831n, 1831o, 1831p–l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 3101 note, 3904, 3906–3909, 4808, 5361, 5362, 5365, 5366, 5367, 5368, 5371. Subpart G—External Long-Term Debt Requirement, External Total LossAbsorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for U.S. Global Systemically Important Banking Organizations 16. In § 252.61, remove the definition of ‘‘External TLAC buffer’’ and add a definition for ‘‘External TLAC riskweighted buffer’’ in alphabetical order. The addition reads as follows: ■ § 252.61 Definitions. * * * * * External TLAC risk-weighted buffer means, with respect to a global systemically important BHC, the sum of 2.5 percent, any applicable countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and the global systemically important BHC’s method 1 capital surcharge. * * * * * ■ 17. In § 252.63, revise paragraphs (c)(3)(i)(C) and (c)(5)(iii)(A)(2) to read as follows: § 252.63 External total loss-absorbing capacity requirement and buffer. * * * * * (c) * * * (3) * * * (i) * * * (C) The ratio (expressed as a percentage) of the global systemically important BHC’s outstanding eligible external long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC due to be paid in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets. * * * * * (5) * * * (iii) * * * (A) * * * (2) The ratio (expressed as a percentage) of the global systemically important BHC’s outstanding eligible PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 external long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC due to be paid in in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total leverage exposure. * * * * * Subpart P—Covered IHC Long-Term Debt Requirement, Covered IHC Total Loss-Absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for Intermediate Holding Companies of Global Systemically Important Foreign Banking Organizations 18. In § 252.160, revise paragraph (b)(2) to read as follows: ■ § 252.160 Applicability. * * * * * (b) * * * (2) 1095 days (three years) after the later of the date on which: (i) The U.S. non-branch assets of the global systemically important foreign banking organization that controls the Covered IHC equaled or exceeded $50 billion; and (ii) The foreign banking organization that controls the Covered IHC became a global systemically important foreign banking organization. * * * * * ■ 19. In § 252.162, revise paragraph (b)(1) to read as follows: § 252.162 Covered IHC long-term debt requirement. * * * * * (b) * * * (1) A Covered IHC’s outstanding eligible Covered IHC long-term debt amount is the sum of: (i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 730 days (two years); and (ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 365 days (one year) and less than 730 days (two years); and (iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in less than 365 days (one year). * * * * * E:\FR\FM\06JAR2.SGM 06JAR2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations 20. In § 252.165, revise paragraph (d)(3)(i)(C) to read as follows: ■ § 252.165 Covered IHC total lossabsorbing capacity requirement and buffer. * * * * * (d) * * * (3) * * * (i) * * * (C) The ratio (expressed as a percentage) of the Covered IHC’s outstanding eligible Covered IHC longterm debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in, as calculated in § 252.162(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets. * * * * * 12 CFR Part 324 FEDERAL DEPOSIT INSURANCE CORPORATION For the reasons set out in the joint preamble, the FDIC amends 12 CFR part 324 as follows. PART 324—CAPITAL ADEQUACY OF FDIC–SUPERVISED INSTITUTIONS 21. The authority citation for part 324 continues to read as follows: ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102–233, 105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102–242, 105 Stat. 2236, 2355, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note); Pub. L. 111–203, 124 Stat. 1376, 1887 (15 U.S.C. 78o–7 note), Pub. L. 115–174; section 4014, Pub. L. 116–136, 134 Stat. 281 (15 U.S.C. 9052). 22. In § 324.2: a. Add in alphabetical order definitions for ‘‘Covered debt instrument’’ and ‘‘Excluded covered debt instrument’’; ■ b. Revise the definitions of ‘‘Fiduciary or custodial and safekeeping account’’ and ‘‘Indirect exposure’’; ■ c. Add in alphabetical order and definition for ‘‘Investment in a covered debt instrument’’; and ■ d. Revise the definitions of ‘‘Synthetic exposure’’ and ‘‘Total leverage exposure’’. The additions and revisions read as follows: jbell on DSKJLSW7X2PROD with RULES2 ■ ■ § 324.2 Definitions. * * * * * Covered debt instrument means an unsecured debt instrument that is: VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 (1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu or subordinated to any eligible debt security issued by the global systemically important BHC; or (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu or subordinated to any eligible Covered IHC debt security issued by the Covered IHC; or (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where, (i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition; for purposes of this paragraph (3)(ii) of this definition, if the issuer may be subject to a special resolution regime, in its jurisdiction of incorporation or organization, that addresses the failure or potential failure of a financial company and any instrument described in paragraph (3)(i) of this definition is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument, then an instrument is pari passu or subordinated to any instrument described in paragraph (3)(i) of this definition if that instrument is eligible under that special resolution regime to be written down or converted into equity or any other capital instrument ahead of or proportionally with any instrument described in paragraph (3)(i) of this definition; and (4) Provided that, for purposes of this definition, covered debt instrument does not include a debt instrument that qualifies as tier 2 capital pursuant to 12 CFR 324.20(d) or that is otherwise treated as regulatory capital by the primary supervisor of the issuer. * * * * * Excluded covered debt instrument means an investment in a covered debt PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 739 instrument held by an FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, that: (1) Is held in connection with market making-related activities permitted under 12 CFR 351.4, provided that a direct exposure or an indirect exposure to a covered debt instrument is held for 30 business days or less; and (2) Has been designated as an excluded covered debt instrument by the FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, pursuant to 12 CFR 324.22(c)(5)(iv)(A). * * * * * Fiduciary or custodial and safekeeping account means, for purposes of § 324.10(c)(2)(x), an account administered by a custody bank for which the custody bank provides fiduciary or custodial and safekeeping services, as authorized by applicable Federal or state law. * * * * * Indirect exposure means an exposure that arises from the FDIC-supervised institution’s investment in an investment fund which holds an investment in the FDIC-supervised institution’s own capital instrument or an investment in the capital of an unconsolidated financial institution. For an advanced approaches FDICsupervised institution, indirect exposure also includes an investment in an investment fund that holds a covered debt instrument. * * * * * Investment in a covered debt instrument means an FDIC-supervised institution’s net long position calculated in accordance with § 324.22(h) in a covered debt instrument, including direct, indirect, and synthetic exposures to the debt instrument, excluding any underwriting positions held by the FDIC-supervised institution for five or fewer business days. * * * * * Synthetic exposure means an exposure whose value is linked to the value of an investment in the FDICsupervised institution’s own capital instrument or to the value of an investment in the capital of an unconsolidated financial institution. For an advanced approaches FDICsupervised institution, synthetic exposure includes an exposure whose value is linked to the value of an investment in a covered debt instrument. * * * * * E:\FR\FM\06JAR2.SGM 06JAR2 740 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations Total leverage exposure is defined in § 324.10(c)(2). * * * * * ■ 23. Section 324.10 is amended by: ■ a. Revising paragraph (c); ■ b. Redesignating paragraph (d) as (e); and ■ c. Adding new paragraph (d). The revision and addition read as follows: § 324.10 Minimum capital requirements. jbell on DSKJLSW7X2PROD with RULES2 * * * * * (c) Supplementary leverage ratio. (1) A Category III FDIC-supervised institution or advanced approaches FDIC-supervised institution must determine its supplementary leverage ratio in accordance with this paragraph, beginning with the calendar quarter immediately following the quarter in which the FDIC-supervised institution is identified as a Category III FDICsupervised institution. An advanced approaches FDIC-supervised institution’s or a Category III FDICsupervised institution’s supplementary leverage ratio is the ratio of its tier 1 capital to total leverage exposure, the latter of which is calculated as the sum of: (i) The mean of the on-balance sheet assets calculated as of each day of the reporting quarter; and (ii) The mean of the off-balance sheet exposures calculated as of the last day of each of the most recent three months, minus the applicable deductions under § 324.22(a), (c), and (d). (2) For purposes of this part, total leverage exposure means the sum of the items described in paragraphs (c)(2)(i) through (viii) of this section, as adjusted pursuant to paragraph (c)(2)(ix) of this section for a clearing member FDICsupervised institution and paragraph (c)(2)(x) of this section for a custody bank: (i) The balance sheet carrying value of all of the FDIC-supervised institution’s on-balance sheet assets, plus the value of securities sold under a repurchase transaction or a securities lending transaction that qualifies for sales treatment under GAAP, less amounts deducted from tier 1 capital under § 324.22(a), (c), and (d), and less the value of securities received in securityfor-security repo-style transactions, where the FDIC-supervised institution acts as a securities lender and includes the securities received in its on-balance sheet assets but has not sold or rehypothecated the securities received, and, for an FDIC-supervised institution that uses the standardized approach for counterparty credit risk under § 324.132(c) for its standardized risk- VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 weighted assets, less the fair value of any derivative contracts; (ii)(A) For an FDIC-supervised institution that uses the current exposure methodology under § 324.34(b) for its standardized riskweighted assets, the potential future credit exposure (PFE) for each derivative contract or each singleproduct netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the FDIC-supervised institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), to which the FDIC-supervised institution is a counterparty as determined under § 324.34, but without regard to § 324.34(c), provided that: (1) An FDIC-supervised institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 324.34, but without regard to § 324.34(c), provided that it does not adjust the net-to-gross ratio (NGR); and (2) An FDIC-supervised institution that chooses to exclude the PFE of credit derivatives or other similar instruments through which it provides credit protection pursuant to this paragraph (c)(2)(ii)(A) must do so consistently over time for the calculation of the PFE for all such instruments; or (B)(1) For an FDIC-supervised institution that uses the standardized approach for counterparty credit risk under section § 324.132(c) for its standardized risk-weighted assets, the PFE for each netting set to which the FDIC-supervised institution is a counterparty (including cleared transactions except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the FDIC-supervised institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), as determined under § 324.132(c)(7), in which the term C in § 324.132(c)(7)(i) equals zero, and, for any counterparty that is not a commercial end-user, multiplied by 1.4. For purposes of this paragraph (c)(2)(ii)(B)(1), an FDIC-supervised institution may set the value of the term C in § 324.132(c)(7)(i) equal to the amount of collateral posted by a clearing member client of the FDIC-supervised institution in connection with the PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 client-facing derivative transactions within the netting set; and (2) An FDIC-supervised institution may choose to exclude the PFE of all credit derivatives or other similar instruments through which it provides credit protection when calculating the PFE under § 324.132(c), provided that it does so consistently over time for the calculation of the PFE for all such instruments; (iii)(A)(1) For an FDIC-supervised institution that uses the current exposure methodology under § 324.34(b) for its standardized riskweighted assets, the amount of cash collateral that is received from a counterparty to a derivative contract and that has offset the mark-to-fair value of the derivative asset, or cash collateral that is posted to a counterparty to a derivative contract and that has reduced the FDIC-supervised institution’s onbalance sheet assets, unless such cash collateral is all or part of variation margin that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (2) The variation margin is used to reduce the current credit exposure of the derivative contract, calculated as described in § 324.34(b), and not the PFE; and (3) For the purpose of the calculation of the NGR described in § 324.34(b)(2)(ii)(B), variation margin described in paragraph (c)(2)(iii)(A)(2) of this section may not reduce the net current credit exposure or the gross current credit exposure; or (B)(1) For an FDIC-supervised institution that uses the standardized approach for counterparty credit risk under § 324.132(c) for its standardized risk-weighted assets, the replacement cost of each derivative contract or single product netting set of derivative contracts to which the FDIC-supervised institution is a counterparty, calculated according to the following formula, and, for any counterparty that is not a commercial end-user, multiplied by 1.4: Replacement Cost = max{V¥CVMr + CVMp; 0} Where: V equals the fair value for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the FDIC-supervised institution, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP); CVMr equals the amount of cash collateral received from a counterparty to a derivative contract and that satisfies the conditions in E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction on behalf of a clearing member client, the amount of collateral received from the clearing member client; and CVMp equals the amount of cash collateral that is posted to a counterparty to a derivative contract and that has not offset the fair value of the derivative contract and that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the case of a client-facing derivative transaction on behalf of a clearing member client, the amount of collateral posted to the clearing member client; (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, where multiple netting sets are subject to a single variation margin agreement, an FDIC-supervised institution must apply the formula for replacement cost provided in § 324.132(c)(10)(i), in which the term CMA may only include cash collateral that satisfies the conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; and (3) For purposes of paragraph (c)(2)(iii)(B)(1), an FDIC-supervised institution must treat a derivative contract that references an index as if it were multiple derivative contracts each referencing one component of the index if the FDICsupervised institution elected to treat the derivative contract as multiple derivative contracts under § 324.132(c)(5)(vi); (C) For derivative contracts that are not cleared through a QCCP, the cash collateral received by the recipient counterparty is not segregated (by law, regulation, or an agreement with the counterparty); (D) Variation margin is calculated and transferred on a daily basis based on the mark-to-fair value of the derivative contract; (E) The variation margin transferred under the derivative contract or the governing rules of the CCP or QCCP for a cleared transaction is the full amount that is necessary to fully extinguish the net current credit exposure to the counterparty of the derivative contracts, subject to the threshold and minimum transfer amounts applicable to the counterparty under the terms of the derivative contract or the governing rules for a cleared transaction; (F) The variation margin is in the form of cash in the same currency as the currency of settlement set forth in the derivative contract, provided that for the purposes of this paragraph (c)(2)(iii)(F), currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement and the credit support annex to the qualifying master netting agreement, or in the governing rules for a cleared transaction; and (G) The derivative contract and the variation margin are governed by a qualifying master netting agreement between the legal entities that are the counterparties to the derivative contract or by the governing rules for a cleared transaction, and the qualifying master netting agreement or the governing rules for a cleared transaction must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 received or provided under the contract if a credit event involving either counterparty occurs; (iv) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the FDIC-supervised institution provides credit protection, provided that: (A) The FDIC-supervised institution may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-to-fair value of the credit derivative if the reduction is recognized in common equity tier 1 capital; (B) The FDIC-supervised institution may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the FDIC-supervised institution provides credit protection and that: (1) With respect to a credit derivative that references a single exposure, the reference exposure of the purchased credit derivative is to the same legal entity and ranks pari passu with, or is junior to, the reference exposure of the credit derivative through which the FDIC-supervised institution provides credit protection; or (2) With respect to a credit derivative that references multiple exposures, the reference exposures of the purchased credit derivative are to the same legal entities and rank pari passu with the reference exposures of the credit derivative through which the FDICsupervised institution provides credit protection, and the level of seniority of the purchased credit derivative ranks pari passu to the level of seniority of the credit derivative through which the FDICsupervised institution provides credit protection; (3) Where an FDIC-supervised institution has reduced the effective notional amount of a credit derivative through which the FDICsupervised institution provides credit protection in accordance with paragraph (c)(2)(iv)(A) of this section, the FDICsupervised institution must also reduce the effective notional principal amount of a purchased credit derivative used to offset the credit derivative through which the FDICsupervised institution provides credit protection, by the amount of any increase in the mark-to-fair value of the purchased credit derivative that is recognized in common equity tier 1 capital; and (4) Where the FDIC-supervised institution purchases credit protection through a total return swap and records the net payments received on a credit derivative through which the FDIC-supervised institution provides credit protection in net income, but does not record offsetting deterioration in the mark-tofair value of the credit derivative through which the FDIC-supervised institution provides credit protection in net income (either through reductions in fair value or by PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 741 additions to reserves), the FDIC-supervised institution may not use the purchased credit protection to offset the effective notional principal amount of the related credit derivative through which the FDICsupervised institution provides credit protection; (v) Where an FDIC-supervised institution acting as a principal has more than one repostyle transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less any on-balance sheet receivables amount associated with these repo-style transactions included under paragraph (c)(2)(i) of this section, unless the following criteria are met: (A) The offsetting transactions have the same explicit final settlement date under their governing agreements; (B) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and (C) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement; (vi) The counterparty credit risk of a repostyle transaction, including where the FDICsupervised institution acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer’s counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows: (A) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i is treated as its own netting set, in accordance with the following formula, where Ei is the fair value of the instruments, gold, or cash that the FDICsupervised institution has lent, sold subject to repurchase, or provided as collateral to the counterparty, and Ci is the fair value of the instruments, gold, or cash that the FDICsupervised institution has borrowed, purchased subject to resale, or received as collateral from the counterparty: Ei* = max {0, [Ei ¥ Ci]}; and (B) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 742 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations fair value of the instruments, gold, or cash that the FDIC-supervised institution has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (SEi), less the total fair value of the instruments, gold, or cash that the FDIC-supervised institution borrowed, purchased subject to resale or received as collateral from the counterparty for those transactions (SCi), in accordance with the following formula: E* = max {0, [SEi ¥ SCi]} (vii) If an FDIC-supervised institution acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer’s counterparty and the guarantee is not limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided; (viii) The credit equivalent amount of all off-balance sheet exposures of the FDICsupervised institution, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 324.33(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and (ix) For an FDIC-supervised institution that is a clearing member: (A) A clearing member FDIC-supervised institution that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure; (B) A clearing member FDIC-supervised institution that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure; (C) A clearing member FDIC-supervised institution that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure; (D) An FDIC-supervised institution that is a clearing member may exclude from its total leverage exposure the effective notional principal amount of credit protection sold through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (c)(2)(iv) of this section; and (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this section, an FDIC-supervised institution may exclude VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 from its total leverage exposure a clearing member’s exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the FDIC-supervised institution’s balance sheet. (x) A custody bank shall exclude from its total leverage exposure the lesser of: (A) The amount of funds that the custody bank has on deposit at a qualifying central bank; and (B) The amount of funds in deposit accounts at the custody bank that are linked to fiduciary or custodial and safekeeping accounts at the custody bank. For purposes of this paragraph (c)(2)(x), a deposit account is linked to a fiduciary or custodial and safekeeping account if the deposit account is provided to a client that maintains a fiduciary or custodial and safekeeping account with the custody bank, and the deposit account is used to facilitate the administration of the fiduciary or custodial and safekeeping account. (d) Advanced approaches capital ratio calculations. An advanced approaches FDICsupervised institution that has completed the parallel run process and received notification from the FDIC pursuant to § 324.121(d) must determine its regulatory capital ratios as described in paragraphs (d)(1) through (3) of this section. (1) Common equity tier 1 capital ratio. The FDIC-supervised institution’s common equity tier 1 capital ratio is the lower of: (i) The ratio of the FDIC-supervised institution’s common equity tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the FDIC-supervised institution’s common equity tier 1 capital to advanced approaches total risk-weighted assets. (2) Tier 1 capital ratio. The FDICsupervised institution’s tier 1 capital ratio is the lower of: (i) The ratio of the FDIC-supervised institution’s tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the FDIC-supervised institution’s tier 1 capital to advanced approaches total risk-weighted assets. (3) Total capital ratio. The FDICsupervised institution’s total capital ratio is the lower of: (i) The ratio of the FDIC-supervised institution’s total capital to standardized total risk-weighted assets; and (ii) The ratio of the FDIC-supervised institution’s advanced-approaches-adjusted total capital to advanced approaches total risk-weighted assets. An FDIC-supervised institution’s advanced-approaches-adjusted total capital is the FDIC-supervised institution’s total capital after being adjusted as follows: (A) An advanced approaches FDICsupervised institution must deduct from its total capital any allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, included in its tier 2 capital in accordance with § 324.20(d)(3); and (B) An advanced approaches FDICsupervised institution must add to its total capital any eligible credit reserves that exceed the FDIC-supervised institution’s total PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the FDIC-supervised institution’s credit risk-weighted assets. (4) State savings association tangible capital ratio. (i) Until January 1, 2014, a state savings association shall determine its tangible capital ratio in accordance with 12 CFR 390.468. (ii) As of January 1, 2014, a state savings association’s tangible capital ratio is the ratio of the state savings association’s core capital (tier 1 capital) to total assets. For purposes of this paragraph, the term total assets shall have the meaning provided in 12 CFR 324.401(g). * * * * * 24. In § 324.22, revise paragraphs (c), (f), and (h) to read as follows: ■ § 324.22 Regulatory capital adjustments and deductions. * * * * * (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23—(1) Investment in the FDIC-supervised institution’s own capital instruments. An FDICsupervised institution must deduct an investment in its own capital instruments, as follows: (i) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 324.20(b)(1); (ii) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own additional tier 1 capital instruments from its additional tier 1 capital elements; and (iii) An FDIC-supervised institution must deduct an investment in the FDICsupervised institution’s own tier 2 capital instruments from its tier 2 capital elements. (2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to reciprocal cross holdings (as described in paragraph (c)(3) of this section), investments in the capital of unconsolidated financial institutions for an FDIC-supervised institution that is not an advanced approaches FDICsupervised institution (as described in paragraph (c)(4) of this section), nonsignificant investments in the capital of unconsolidated financial institutions for 23 The FDIC-supervised institution must calculate amounts deducted under paragraphs (c) through (f) of this section after it calculates the amount of ALLL or AACL, as applicable, includable in tier 2 capital under § 324.20(d)(3). E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations an advanced approaches FDICsupervised institution (as described in paragraph (c)(5) of this section), and non-common stock significant investments in the capital of unconsolidated financial institutions for an advanced approaches FDICsupervised institution (as described in paragraph (c)(6) of this section). Under the corresponding deduction approach, an FDIC-supervised institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the FDIC-supervised institution itself, as described in paragraphs (c)(2)(i) through (iii) of this section. If the FDIC-supervised institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the FDICsupervised institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 324.20, the FDIC-supervised institution must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches FDIC-supervised institution, a tier 2 capital instrument if it is a covered debt instrument. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 324.300(c)), the FDICsupervised institution must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer’s tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer’s tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross holdings in the capital of financial institutions. (i) An FDIC-supervised institution must deduct an investment in the capital of other financial institutions that it holds reciprocally, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (ii) An advanced approaches FDICsupervised institution must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other’s capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Investments in the capital of unconsolidated financial institutions. An FDIC-supervised institution that is not an advanced approaches FDICsupervised institution must deduct its investments in the capital of unconsolidated financial institutions (as defined in § 324.2) that exceed 25 percent of the sum of the FDICsupervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section by applying the corresponding deduction approach in paragraph (c)(2) of this section.24 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written 24 With the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an FDICsupervised institution that is not an advanced approaches FDIC-supervised institution, is not required to deduct an investment in the capital of an unconsolidated financial institution pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the FDIC. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 743 approval of the FDIC, an FDICsupervised institution that underwrites a failed underwriting, for the period of time stipulated by the FDIC, is not required to deduct an investment in the capital of an unconsolidated financial institution pursuant to this paragraph (c) to the extent the investment is related to the failed underwriting.25 (5) Non-significant investments in the capital of unconsolidated financial institutions. (i) An advanced approaches FDIC-supervised institution must deduct its non-significant investments in the capital of unconsolidated financial institutions (as defined in § 324.2) that, in the aggregate and together with any investment in a covered debt instrument (as defined in § 324.2) issued by a financial institution in which the FDIC-supervised institution does not have a significant investment in the capital of the unconsolidated financial institution (as defined in § 324.2), exceeds 10 percent of the sum of the advanced approaches FDIC-supervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section (the 10 percent threshold for non-significant investments) by applying the corresponding deduction approach in paragraph (c)(2) of this section.26 The deductions described in this paragraph are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, an advanced approaches FDIC-supervised institution that underwrites a failed underwriting, for the period of time stipulated by the FDIC, is not required to deduct from capital a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(5) to the extent the investment is related to the failed 25 Any investments in the capital of an unconsolidated financial institution that do not exceed the 25 percent threshold for investments in the capital of unconsolidated financial institutions under this section must be assigned the appropriate risk weight under subparts D or F of this part, as applicable. 26 With the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDIC-supervised institution is not required to deduct a non-significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph if the financial institution is in distress and if such investment is made for the purpose of providing financial support to the financial institution, as determined by the FDIC. E:\FR\FM\06JAR2.SGM 06JAR2 744 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES2 underwriting.27 For any calculation under this paragraph (c)(5)(i), an advanced approaches FDIC-supervised institution may exclude the amount of an investment in a covered debt instrument under paragraph (c)(5)(iii) or (iv) of this section, as applicable. (ii) For an advanced approaches FDICsupervised institution, the amount to be deducted under this paragraph (c)(5) from a specific capital component is equal to: (A) The advanced approaches FDICsupervised institution’s aggregate nonsignificant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(5), exceeding the 10 percent threshold for non-significant investments, multiplied by (B) The ratio of the advanced approaches FDIC-supervised institution’s aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the advanced approaches FDICsupervised institution’s total nonsignificant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iii) For purposes of applying the deduction under paragraph (c)(5)(i) of this section, an advanced approaches FDIC-supervised institution that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may exclude from the deduction the amount of the FDIC-supervised institution’s gross long position, in accordance with § 324.22(h)(2), in investments in covered debt instruments issued by financial institutions in which the FDICsupervised institution does not have a significant investment in the capital of the unconsolidated financial institutions up to an amount equal to 5 percent of the sum of the FDICsupervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. 27 Any non-significant investment in the capital of an unconsolidated financial institution or any investment in a covered debt instrument that is not required to be deducted under this paragraph (c)(5) or otherwise under this section must be assigned the appropriate risk weight under subparts D, E, or F of this part, as applicable. VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 (iv) Prior to applying the deduction under paragraph (c)(5)(i) of this section: (A) An FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 324.2. (B) An FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct, according to the corresponding deduction approach in paragraph (c)(2) of this section, its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, but no longer qualifies as an excluded covered debt instrument. (C) An FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section the amount of its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a direct or indirect investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, and has been held for more than thirty business days. (D) An FDIC-supervised institution that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section its gross long position, calculated in accordance with paragraph (h)(2) of this section, of its aggregate position in excluded covered debt instruments that exceeds 5 percent of the sum of the FDIC-supervised institution’s common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (6) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. If an advanced approaches FDIC-supervised institution has a significant investment in the capital of an unconsolidated financial institution, the advanced approaches FDIC-supervised institution must PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 deduct from capital any such investment issued by the unconsolidated financial institution that is held by the FDIC-supervised institution other than an investment in the form of common stock, as well as any investment in a covered debt instrument issued by the unconsolidated financial institution, by applying the corresponding deduction approach in paragraph (c)(2) of this section.28 The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. In addition, with the prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDICsupervised institution that underwrites a failed underwriting is not required to deduct the significant investment in the capital of an unconsolidated financial institution or an investment in a covered debt instrument pursuant to this paragraph (c)(6) if such investment is related to such failed underwriting. * * * * * (f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if an FDICsupervised institution does not have a sufficient amount of a specific component of capital to effect the full amount of any deduction from capital required under paragraph (d) of this section, the FDIC-supervised institution must deduct the shortfall amount from the next higher (that is, more subordinated) component of regulatory capital. Any investment by an advanced approaches FDIC-supervised institution in a covered debt instrument must be treated as an investment in the tier 2 capital for purposes of this paragraph (f). Notwithstanding any other provision of this section, a qualifying community banking organization (as defined in § 324.12) that has elected to use the community bank leverage ratio framework pursuant to § 324.12 is not required to deduct any shortfall of tier 2 capital from its additional tier 1 capital or common equity tier 1 capital. * * * * * (h) Net long position—(1) In general. For purposes of calculating the amount of an FDIC-supervised institution’s investment in the FDIC-supervised 28 With prior written approval of the FDIC, for the period of time stipulated by the FDIC, an advanced approaches FDIC-supervised institution is not required to deduct a significant investment in the capital of an unconsolidated financial institution, including an investment in a covered debt instrument, under this paragraph (c)(6) or otherwise under this section if such investment is made for the purpose of providing financial support to the financial institution as determined by the FDIC. E:\FR\FM\06JAR2.SGM 06JAR2 jbell on DSKJLSW7X2PROD with RULES2 Federal Register / Vol. 86, No. 3 / Wednesday, January 6, 2021 / Rules and Regulations institution’s own capital instrument, investment in the capital of an unconsolidated financial institution, and investment in a covered debt instrument under this section, the institution’s net long position is the gross long position in the underlying instrument determined in accordance with paragraph (h)(2) of this section, as adjusted to recognize any short position by the FDIC-supervised institution in the same instrument subject to paragraph (h)(3) of this section. (2) Gross long position. A gross long position is determined as follows: (i) For an equity exposure that is held directly by the FDIC-supervised institution, the adjusted carrying value of the exposure as that term is defined in § 324.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 324.2; (iii) For each indirect exposure, the FDIC-supervised institution’s carrying value of its investment in an investment fund or, alternatively: (A) An FDIC-supervised institution may, with the prior approval of the FDIC, use a conservative estimate of the amount of its indirect investment in the FDIC-supervised institution’s own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) An FDIC-supervised institution may calculate the gross long position for an indirect exposure to the FDICsupervised institution’s own capital instruments, the capital of an unconsolidated financial institution, or a covered debt instrument by multiplying the FDIC-supervised institution’s carrying value of its investment in the investment fund by either: (1) The highest stated investment limit (in percent) for an investment in the FDIC-supervised institution’s own capital instruments, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument, as applicable, as stated in the prospectus, partnership agreement, or similar contract defining permissible investments of the investment fund; or (2) The investment fund’s actual holdings (in percent) of the investment in the FDIC-supervised institution’s own capital instruments, investment in VerDate Sep<11>2014 19:58 Jan 05, 2021 Jkt 253001 the capital of an unconsolidated financial institution, or investment in a covered debt instrument, as applicable; and (iv) For a synthetic exposure, the amount of the FDIC-supervised institution’s loss on the exposure if the reference capital or covered debt instrument were to have a value of zero. (3) Adjustments to reflect a short position. In order to adjust the gross long position to recognize a short position in the same instrument under paragraph (h)(1) of this section, the following criteria must be met: (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the FDIC-supervised institution’s Call Report, if the FDIC-supervised institution has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the FDIC-supervised institution exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in an FDICsupervised institution’s own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section: (A) The FDIC-supervised institution may only net a short position against a long position in an investment in the FDIC-supervised institution’s own capital instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the FDIC-supervised institution’s own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; PO 00000 Frm 00039 Fmt 4701 Sfmt 9990 745 (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the FDICsupervised institution’s own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or offbalance sheet) on the FDIC-supervised institution’s Call Report, and the hedge is deemed effective by the FDICsupervised institution’s internal control processes, which have not been found to be inadequate by the FDIC. § 324.121 [Amended] 25. Section 324.121 is amended by removing ‘‘§ 324.10(c)(1) through (3)’’ and adding ‘‘§ 324.10(d)(1) through (3)’’ in paragraph (c). ■ § 324.132 [Amended] 6. Section 324.132 is amended by removing ‘‘§ 324.10(c)(4)(ii)(B)’’ and adding ‘‘§ 324.10(c)(2)(ii)(B)’’ in paragraph (c)(7)(iii) and (iv). ■ § 324.304 [Amended] 27. Section 324.304 is amended by: a. Removing ‘‘§ 324.10(c)(4)’’ and adding in its place ‘‘§ 324.10(c)’’ in paragraph (a) introductory text; and ■ b. Removing ‘‘§ 324.10(c)(4)(ii)(J)(1)’’ and adding in its place ‘‘§ 324.10(c)(2)(x)(A)’’ in paragraph (e). ■ ■ Brian P. Brooks, Acting Comptroller of the Currency. By order of the Board of Governors of the Federal Reserve System. Ann E. Misback, Secretary of the Board. Federal Deposit Insurance Corporation. By order of the Board of Directors. Dated at Washington, DC, on or about October 20, 2020. James P. Sheesley, Assistant Executive Secretary. [FR Doc. 2020–27046 Filed 1–5–21; 8:45 am] BILLING CODE 4810–33–6210–01–6714–01–P E:\FR\FM\06JAR2.SGM 06JAR2

Agencies

[Federal Register Volume 86, Number 3 (Wednesday, January 6, 2021)]
[Rules and Regulations]
[Pages 708-745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27046]



[[Page 707]]

Vol. 86

Wednesday,

No. 3

January 6, 2021

Part II





Department of the Treasury





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Office of the Comptroller of the Currency





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12 CFR Part 3





Federal Reserve System





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12 CFR Parts 217 and 252





Federal Deposit Insurance Corporation





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12 CFR Part 324





Regulatory Capital Treatment for Investments in Certain Unsecured Debt 
Instruments of Global Systemically Important U.S. Bank Holding 
Companies, Certain Intermediate Holding Companies, and Global 
Systemically Important Foreign Banking Organizations; Total Loss-
Absorbing Capacity Requirements; Final Rule

Federal Register / Vol. 86 , No. 3 / Wednesday, January 6, 2021 / 
Rules and Regulations

[[Page 708]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2018-0019]
RIN 1557-AE38

FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 252

[Regulation Q; Docket No. R-1655]
RIN 7100-AF43

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AE79


Regulatory Capital Treatment for Investments in Certain Unsecured 
Debt Instruments of Global Systemically Important U.S. Bank Holding 
Companies, Certain Intermediate Holding Companies, and Global 
Systemically Important Foreign Banking Organizations; Total Loss-
Absorbing Capacity Requirements

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); the 
Board of Governors of the Federal Reserve System (Board); and the 
Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The OCC, Board, and FDIC (collectively, the agencies) are 
adopting a final rule that applies to advanced approaches banking 
organizations with the aim of reducing both interconnectedness within 
the financial system and systemic risks. The final rule requires 
deduction from a banking organization's regulatory capital for certain 
investments in unsecured debt instruments issued by foreign or U.S. 
global systemically important banking organizations (GSIBs) for the 
purposes of meeting minimum total loss-absorbing capacity (TLAC) 
requirements and, where applicable, long-term debt requirements, or for 
investments in unsecured debt instruments issued by GSIBs that are pari 
passu or subordinated to such debt instruments. In addition, the Board 
is adopting changes to its TLAC rules to clarify requirements and 
correct drafting errors.

DATES: The final rule is effective on April 1, 2021.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Andrew Tschirhart, Risk Expert (202) 649-6370, Capital and 
Regulatory Policy; or Carl Kaminski, Special Counsel, or Jean Xiao, 
Attorney, Chief Counsel's Office, (202) 649-5490, for persons who are 
deaf or hearing impaired, TTY, (202) 649-5597, Office of the 
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Constance M. Horsley, Deputy Associate Director, (202) 452-
5239; Juan Climent, Assistant Director, (202) 872-7526; Mark Handzlik, 
Manager, (202) 475-6636; Sean Healey, Lead Financial Institution Policy 
Analyst, (202) 912-4611; Division of Supervision and Regulation; or 
Benjamin McDonough, Assistant General Counsel (202) 452-2036; or Mark 
Buresh, Senior Counsel (202) 452-5270, Legal Division, Board of 
Governors of the Federal Reserve System, 20th and C Streets NW, 
Washington, DC 20551. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Benedetto Bosco, Chief, Capital Policy Section; 
[email protected]; Richard Smith, Capital Markets Policy Analyst, 
[email protected]; [email protected]; Capital Markets Branch, 
Division of Risk Management Supervision, (202) 898-6888; or Michael 
Phillips, Counsel, [email protected]; Catherine Wood, Counsel, 
[email protected]; or Ryan Rappa, Counsel, [email protected], Legal 
Division, Federal Deposit Insurance Corporation, 550 17th Street NW, 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
    A. Capital Requirements
    B. TLAC Rule
III. Overview of the Notice of Proposed Rulemaking and Comments
IV. Summary of the Final Rule
V. Regulatory Capital Treatment for Advanced Approaches Banking 
Organizations' Investments in Covered Debt Instruments
    A. Scope of Application
    B. Deduction From Tier 2 Capital
    C. Amendments to Definitions
    D. Investments in Covered Banking Organizations' Own Covered 
Debt Instruments and Reciprocal Cross Holdings
    E. Significant and Non-Significant Investments in Covered Debt 
Instruments
    F. Corresponding Deduction Approach
    G. Net Long Position Calculation
VI. Technical Amendment and Other Comments
VII. Amendments to the Board's TLAC Rule
VIII. Changes to Regulatory Reporting
    A. Deductions From Tier 2 Capital Related to Investments in 
Covered Debt Instruments and Excluded Covered Debt Instruments
    B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs 
and Covered IHCs
IX. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act Analysis
    C. Plain Language
    D. OCC Unfunded Mandates Reform Act of 1995 Determination
    E. Riegle Community Development and Regulatory Improvement Act 
of 1994
    F. Congressional Review Act

I. Introduction

    The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), and Federal Deposit 
Insurance Corporation (FDIC) (together, the agencies) are issuing a 
final rule to revise the regulatory capital rule in a manner 
substantially consistent with a proposed rule issued in April 2019 
(proposal).\1\ The final rule addresses the regulatory capital 
treatment of investments by advanced approaches banking organizations 
in unsecured debt instruments issued by foreign or U.S. global 
systemically important banking organizations (GSIBs) for the purposes 
of meeting minimum total loss-absorbing capacity (TLAC) requirements 
and, as applicable, long-term debt requirements, or of investments in 
unsecured debt instruments issued by GSIBs that are pari passu or 
subordinated to such debt instruments (covered debt instruments).\2\ 
Consistent with the proposal, the exposures of an advanced approaches 
banking organization to covered debt instruments generally are subject 
to deduction from the banking

[[Page 709]]

organization's regulatory capital. The final rule includes certain 
adjustments to the proposal in response to comments. The final rule 
aims to reduce both interconnectedness within the financial system and 
systemic risks.
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    \1\ See 84 FR 13814 (April 8, 2019).
    \2\ When the proposal was issued, a banking organization was an 
``advanced approaches banking organization'' if it had total assets 
of at least $250 billion, or if it had consolidated on-balance sheet 
foreign exposures of at least $10 billion, or if it was a subsidiary 
of a depository institution, bank holding company, savings and loan 
holding company or intermediate holding company that was an advanced 
approaches banking organization. See 78 FR 62018, 62204 (October 11, 
2013), 78 FR 55340, 55523 (September 10, 2013). See also 12 CFR part 
3 (OCC); 12 CFR part 217 (Board); and 12 CFR part 324 (FDIC). In 
November 2019, the agencies issued a final rule to revise the 
criteria for determining the applicability of regulatory capital and 
liquidity requirements for large U.S. banking organizations and the 
U.S. intermediate holding companies of certain foreign banking 
organizations, including the application of the advanced approaches 
(interagency tailoring final rule). Under this final rule, advanced 
approaches banking organizations include those banking organizations 
subject to Category I standards (those banking organizations that 
qualify as U.S. GSIBs) or Category II standards (banking 
organizations with (1) at least $700 billion in total consolidated 
assets or (2) at least $75 billion in cross-jurisdictional activity 
and more than $100 billion in total consolidated assets), and a 
subsidiary depository institution of such a banking organization. 
See 84 FR 59230 (November 1, 2019).
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II. Background

A. Capital Requirements

    The agencies' regulatory capital rule (capital rule) imposes 
minimum capital requirements on banking organizations measured through 
risk-based and leverage capital ratios.\3\ These regulatory capital 
ratios consist of regulatory capital measures relative to risk-weighted 
assets and total assets, respectively.\4\ The numerators of the 
regulatory capital ratios include various adjustments and deductions to 
balance-sheet-based regulatory capital components.
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    \3\ Banking organizations subject to the agencies' capital rule 
include national banks, state member banks, insured state nonmember 
banks, savings associations, and top-tier bank holding companies, 
intermediate holding companies, and savings and loan holding 
companies domiciled in the United States, but exclude banking 
organizations subject to the Board's Small Bank Holding Company and 
Savings and Loan Holding Company Policy Statement (12 CFR part 225, 
appendix C), qualifying community banking organizations that elect 
to comply with the agencies' community bank leverage ratio 
framework, and certain savings and loan holding companies that are 
substantially engaged in insurance underwriting or commercial 
activities or that are estate trusts, and bank holding companies and 
savings and loan holding companies that are employee stock ownership 
plans.
    \4\ See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); and 12 
CFR 324.10(a) (FDIC). In addition to the generally applicable 
leverage ratio, advanced approaches banking organizations are 
subject to a supplementary leverage ratio, which measures a banking 
organization's tier 1 capital relative to its on-balance sheet and 
certain off-balance sheet exposures.
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    The capital rule includes two broad categories of deductions from 
regulatory capital related to investments in the capital instruments of 
financial institutions by advanced approaches banking organizations.\5\ 
First, it requires a banking organization to deduct any investment in 
its own regulatory capital instruments and any investment in regulatory 
capital instruments held reciprocally with another financial 
institution (reciprocal cross holding).\6\ Second, it requires a 
banking organization to deduct investments in capital instruments 
issued by unconsolidated financial institutions that would qualify as 
regulatory capital if issued by the banking organization itself.\7\ For 
the purpose of the latter deduction, a banking organization may be 
required to deduct the entire amount of the investment, or it may be 
required to deduct only the portion of the investment that exceeds a 
certain threshold.\8\ These deductions are intended to reduce 
interconnectedness and contagion risk among financial institutions by 
discouraging banking organizations from investing in the capital of 
other financial institutions.
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    \5\ A different deduction framework applies to non-advanced 
approaches banking organizations. See 84 FR 35234 (July 22, 2019).
    \6\ See 12 CFR 3.22(c)(1) (OCC); 12 CFR 217.22(c)(1) (Board); 
and 12 CFR 324.22(c)(1) (FDIC).
    \7\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 
and 12 CFR 324.22(c)(2) (FDIC).
    \8\ See 12 CFR 3.22(c)(3), (c)(5), and (c)(6) (OCC); 12 CFR 
217.22(c)(3), (c)(5), and (c)(6) (Board); and 12 CFR 324.22(c)(3), 
(c)(5), and (c)(6) (FDIC).
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    For deductions related to investments in the capital of 
unconsolidated financial institutions, a banking organization must 
deduct from the component of regulatory capital for which the 
instrument qualifies or would qualify if it were issued by the banking 
organization that is holding the exposure.\9\ For example, an advanced 
approaches banking organization that owns 10 percent or less of the 
common stock of an unconsolidated financial institution is said to have 
a ``non-significant investment'' in the capital of the unconsolidated 
financial institution. If the advanced approaches banking organization 
invests in tier 2 instruments issued by the unconsolidated financial 
institution, then it must deduct from its own tier 2 capital the 
amount, if any, by which the investment, combined with other non-
significant investments in the capital of other unconsolidated 
financial institutions, exceeds 10 percent of the sum of the banking 
organization's common equity tier 1 capital elements minus all 
deductions from and adjustments to common equity tier 1 capital 
elements required under section __.22(a) through __.22(c)(3), net of 
associated deferred tax liabilities (DTLs) (10 percent threshold for 
non-significant investments). Any non-significant investments in the 
capital of unconsolidated financial institutions that are not deducted 
from regulatory capital are risk-weighted in accordance with the 
capital rule.\10\
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    \9\ See 12 CFR part 3, subparts D, E, or F, as applicable (OCC); 
12 CFR part 217, subparts D, E, and F, as applicable (Board); and 12 
CFR part 324, subparts D, E, or F, as applicable (FDIC).
    \10\ See 12 CFR part 3, subparts D, E, or F, as applicable 
(OCC); 12 CFR part 217, subparts D, E, and F, as applicable (Board); 
and 12 CFR part 324, subparts D, E, or F, as applicable (FDIC).
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B. TLAC Rule

    In December 2016, the Board issued a final rule to require the 
largest domestic and foreign banking organizations operating in the 
United States to maintain a minimum amount of total loss-absorbing 
capacity (TLAC), consisting of tier 1 capital (excluding minority 
interest) and certain long-term debt instruments (TLAC rule).\11\ The 
TLAC rule applies to a U.S. top-tier bank holding company identified 
under the Board's rules as a global systemically important bank holding 
company (covered BHC) or a top-tier U.S. intermediate holding company 
subsidiary of a global systemically important foreign banking 
organization (foreign GSIB) with $50 billion or more in U.S. non-branch 
assets (covered IHC) (collectively, covered banking organizations).
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    \11\ See 82 FR 8266 (January 24, 2017); 12 CFR part 252, 
subparts G and P. The TLAC rule's TLAC and long-term debt 
requirements took effect on January 1, 2019.
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    The objective of the TLAC rule is to enhance financial stability by 
reducing the impact of the failure of covered banking organizations by 
requiring such organizations to have sufficient loss-absorbing capacity 
on both a going-concern and a gone-concern basis. The TLAC rule 
includes requirements that a covered banking organization maintain 
outstanding minimum levels of TLAC and long-term debt.\12\ TLAC is the 
sum of the tier 1 capital instruments issued directly by the covered 
banking organization (excluding minority interest) and the long-term 
debt issued directly by the covered banking organization. Under the 
TLAC rule, long-term debt is generally unsecured debt that is issued 
directly by a covered banking organization, has no features that would 
interfere with an orderly resolution proceeding, has a remaining 
maturity of at least one year, and is governed by U.S. law, among other 
provisions.\13\
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    \12\ See 12 CFR 252.62 and 252.63; 12 CFR 252.162 and 252.165. 
The requirements applicable under the TLAC rule to covered BHCs and 
covered IHCs are similar but not identical.
    \13\ Long-term debt issued by a covered IHC to affiliates of the 
covered IHC is subject to notable additional requirements, including 
the inclusion of a provision allowing the Board to order the 
conversion of the debt into common equity tier 1 capital of the 
covered IHC. See 12 CFR 252.163.
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    Long-term debt instruments under the TLAC rule are capable of 
absorbing losses in resolution (i.e., on a gone-concern basis). This is 
because the debt holders' claim on a banking organization's assets may 
not receive full payment in a resolution, receivership, insolvency, or 
similar proceeding.\14\ This potential loss-

[[Page 710]]

absorbing capacity of long-term debt is part of the rationale for the 
deduction approach for investments in such debt instruments under this 
final rule.\15\
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    \14\ The internal debt conversion provision included in covered 
IHC long-term debt issued to affiliates performs a similar function 
outside of a resolution proceeding.
    \15\ Long-term debt under the TLAC rule may also qualify as tier 
2 capital under the capital rule, if it satisfies the eligibility 
criteria for tier 2 capital.
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    Given the ability of long-term debt to absorb the losses of a 
covered banking organization in a resolution, receivership, insolvency, 
or similar proceeding, the Board proposed regulatory capital deductions 
for investments by Board-regulated banking organizations in long-term 
debt issued under the TLAC rule when it initially proposed the TLAC 
rule in 2015.\16\ The Board did not finalize these limitations when it 
issued the final TLAC rule because it needed additional time to work 
with the OCC and the FDIC to develop a proposed interagency approach 
regarding the regulatory capital treatment for investments in certain 
debt instruments issued by covered banking organizations.
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    \16\ The proposal of the TLAC rule in 2015 was issued solely by 
the Board. Therefore, the proposed regulatory capital deductions in 
that proposal would have only applied to Board-regulated banking 
organizations, which include bank holding companies, intermediate 
holding companies, savings and loan holdings companies, and state 
member banks.
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III. Overview of Notice of Proposed Rulemaking and Comments

    In April 2019, the agencies issued a proposal to address, for 
purposes of the capital rule, the systemic risks posed by an advanced 
approaches banking organization's investments in covered debt 
instruments and to create an incentive for advanced approaches banking 
organizations to limit their exposure to GSIBs. The deductions required 
under the proposal would have affected the capital ratios of advanced 
approaches banking organizations. Without the proposed changes, 
investments in covered debt instruments issued by covered BHCs, foreign 
GSIBs, and covered IHCs are generally not subject to deduction and 
would generally be subject to a risk weight of 100 percent.
    An investment in a covered debt instrument, as defined in the 
proposal, by an advanced approaches banking organization would have 
been treated as an investment in a tier 2 capital instrument for 
purposes of the existing deduction framework. As a result, an 
investment in a covered debt instrument would have been subject to 
deduction from the advanced approaches banking organization's own tier 
2 capital.
    The existing corresponding deduction approach in the capital rule 
would have been amended to apply any required deduction by advanced 
approaches banking organizations of an investment in a covered debt 
instrument that exceeded certain thresholds, consistent with the 
deduction framework for investments in the capital of unconsolidated 
financial institutions. In addition, the existing deduction approaches 
under the capital rule would have been amended to apply to an advanced 
approaches banking organization's reciprocal cross holdings of covered 
debt instruments; that is, an advanced approaches banking organization 
would have deducted from its own tier 2 capital any reciprocal cross 
holdings of covered debt instruments with another banking organization. 
The existing deduction approaches under the capital rule would have 
also been amended to apply to a covered BHC's investments in its own 
covered debt instruments. Similarly, the existing deduction approaches 
under the capital rule would have also been amended to apply to a 
covered IHC subject to the advanced approaches (advanced approaches 
covered IHC) and its investments in its own covered debt instruments.
    The proposal also included certain exclusions from deduction. 
Importantly, the proposal would have allowed advanced approaches 
banking organizations to exclude from deduction investments in covered 
debt instruments, subject to certain qualifying and measurement 
criteria, that are five percent or less of the sum of advanced 
approaches banking organization's common equity tier 1 capital elements 
minus all deductions from and adjustments to common equity tier 1 
capital elements required under section __.22(a) through __.22(c)(3), 
net of associated DTLs (five percent exclusion). As discussed in the 
preamble to the proposal, the agencies designed the exclusion from 
deduction to support deep and liquid markets for covered debt 
instruments issued by GSIBs. In the case of a U.S. GSIB, it would have 
applied the proposed exclusion only to ``excluded covered debt 
instruments,'' which were defined in the proposal as covered debt 
instruments held for 30 business days or less and held for the purpose 
of short-term resale or with the intent of benefiting from actual or 
expected short-term price movements, or to lock in arbitrage profits. 
This provision was intended to limit the five percent exclusion for 
U.S. GSIBs to covered debt instruments held in connection with market 
making activities. Advanced approaches banking organizations that are 
not U.S. GSIBs would not have been subject to this limit on the use of 
the five percent exclusion. Under the proposal's five percent 
exclusion, all advanced approaches banking organizations could exclude 
covered debt instruments measured on a gross long basis from the 
deduction framework up to a cap of five percent of the banking 
organization's common equity tier 1 capital.
    The proposal would have revised section __.22(c), (f), and (h) of 
the capital rule to incorporate the proposed deduction approach for 
investments in covered debt instruments, and added several new 
definitions to section __.2 to effectuate these deductions. Further, 
the definition of ``investment in the capital of an unconsolidated 
financial institution'' would have been amended to correct a 
typographical error.
    Collectively, the agencies received ten public comment letters from 
trade associations, public interest groups, private individuals, and 
other interested parties. As further detailed below, commenters 
generally supported the overarching goal of the proposal to reduce 
interconnectedness by creating an incentive for advanced approaches 
banking organizations to limit their exposure to GSIBs. However, 
commenters also expressed certain general concerns with the proposal 
and noted specific concerns with certain technical aspects of it.
    The agencies are jointly finalizing a regulatory capital treatment 
for investments in covered debt instruments that applies to advanced 
approaches banking organizations. The final rule is substantially 
consistent with the proposal, with certain modifications in response to 
comments as well as some technical clarifications.

IV. Summary of the Final Rule

    The final rule applies to advanced approaches banking organizations 
and generally requires deductions from capital for direct, indirect, 
and synthetic exposures to covered debt instruments and any other 
unsecured debt instruments pari passu or subordinated to covered debt 
instruments.\17\ Under the final rule, an advanced approaches banking 
organization treats investments in covered debt instruments as 
investments in tier 2 capital instruments for purposes of applying the 
corresponding deduction approach in

[[Page 711]]

the capital rule. Deduction from capital is required for:
---------------------------------------------------------------------------

    \17\ As discussed further in section V.C.2 below, the final rule 
excludes certain unsecured debt instruments issued by foreign GSIBs 
from the scope of the final rule. Specifically, the final rule 
generally excludes from the definition of covered debt instrument an 
unsecured debt instrument that cannot be written down or converted 
into equity (i.e., bailed in) under a special resolution regime.
---------------------------------------------------------------------------

     Investments in a covered BHC's or advanced approaches 
covered IHC's own covered debt instruments, as applicable;
     Reciprocal cross holdings with another financial 
institution of covered debt instruments;
     Investments in covered debt instruments of a financial 
institution while also holding 10 percent or more of the financial 
institution's common stock; and
     Investments in covered debt instruments that, together 
with investments in the capital of unconsolidated financial 
institutions, exceed 10 percent of the investing advanced approaches 
banking organization's common equity tier 1 capital.
     Under the final rule, an advanced approaches banking 
organization may exclude from deduction investments in certain covered 
debt instruments up to five percent of its common equity tier 1 
capital, as measured on a gross long basis.\18\ Usage of the five 
percent exclusion is tailored, depending on whether the advanced 
approaches banking organization is a U.S. GSIB.
---------------------------------------------------------------------------

    \18\ See 12 CFR 3.22(h)(2) (OCC); 12 CFR 217.22(h)(2) (Board); 
12 CFR 324.2(h)(2) (FDIC).
---------------------------------------------------------------------------

    For U.S. GSIBs, only ``excluded covered debt instruments'' are 
eligible for the five percent exclusion in the final rule. Generally, 
``excluded covered debt instruments'' in the final rule are investments 
in covered debt instruments that are held in accordance with market 
making activities, as identified using criteria from the regulations 
implementing section 13 of the Bank Holding Company Act (commonly known 
as the Volcker Rule) as discussed in more detail in section V.E. below. 
A U.S. GSIB's direct or indirect exposure to a covered debt instrument 
is an excluded covered debt instrument if the exposure is held for 30 
or fewer business days and held in connection with market making-
related activities. A U.S. GSIB's holding of a synthetic exposure to a 
covered debt instrument is not limited to 30 business days in order to 
qualify as an excluded covered debt instrument.
    For advanced approaches banking organizations that are not U.S. 
GSIBs, any direct, indirect, or synthetic exposure to a covered debt 
instrument issued by an unconsolidated financial institution that is a 
non-significant investment is eligible for the five percent exclusion 
in the final rule.
    The final rule revises section __.22(c), (f), and (h) of the 
capital rule to incorporate the deduction approach for investments in 
covered debt instruments. As with the proposal, several new definitions 
are added to section __.2 in the final rule to effectuate these 
deductions. More information on these specific revisions to the capital 
rule are provided below.

V. Regulatory Capital Treatment for Advanced Approaches Banking 
Organizations' Investments in Covered Debt Instruments

A. Scope of Application

    The proposal would have applied the deduction framework for covered 
debt instruments to advanced approaches banking organizations. Since 
the proposal was issued, the agencies issued the interagency tailoring 
final rule that included revisions to the scope of advanced approaches 
banking organizations.\19\ As a result of the interagency tailoring 
final rule, ``advanced approaches banking organizations'' include those 
banking organizations subject to Category I standards (i.e., those 
banking organizations that qualify as U.S. GSIBs), Category II 
standards (i.e., banking organizations with (1) at least $700 billion 
in total consolidated assets or (2) at least $75 billion in cross-
jurisdictional activity and at least $100 billion in total consolidated 
assets), or a subsidiary depository institution of a banking 
organization subject to Category I or II standards. Some commenters 
suggested that the agencies should apply the proposal to all banking 
organizations subject to the capital rule. Other commenters suggested 
the agencies apply the proposal to all banking organizations subject to 
Category I through IV standards, as defined in the interagency 
tailoring final rule.\20\
---------------------------------------------------------------------------

    \19\ See 84 FR 59230 (November 1, 2019).
    \20\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC).
---------------------------------------------------------------------------

    After considering the comments, the agencies are continuing to 
limit the scope of this rule to advanced approaches banking 
organizations, as revised by the interagency tailoring final rule. As 
explained in the proposal, the systemic risks associated with banking 
organizations' investments in covered debt instruments is greatest for 
the banking organizations covered by the proposal. However, the 
agencies acknowledge the possibility of potential systemic risks 
associated with other banking organizations' investments in covered 
debt instruments and will continue to evaluate whether additional steps 
are warranted to address such risks.

B. Deduction From Tier 2 Capital

    Under the agencies' capital rule, a banking organization must 
deduct from regulatory capital any investments in its own capital 
instruments and in the capital of other financial institutions that it 
holds reciprocally. Other investments in the capital of unconsolidated 
financial institutions are subject to deduction to the extent they 
exceed certain thresholds.
    Under the proposal, an investment in a covered debt instrument by 
an advanced approaches banking organization would have been treated as 
an investment in a tier 2 capital instrument for purposes of the 
deduction framework, and therefore, would have been subject to 
deduction from the advanced approaches banking organization's own tier 
2 capital. The existing corresponding deduction approach in the capital 
rule would have been amended to apply to any deduction by advanced 
approaches banking organizations of an investment in a covered debt 
instrument that exceeded certain thresholds, as if the covered debt 
instrument were a tier 2 capital instrument. In addition, the existing 
deduction approaches under the capital rule would have been amended to 
apply to a covered BHC's or advanced approaches covered IHC's 
investments in its own covered debt instruments, and to advanced 
approaches banking organizations' reciprocal cross holdings of covered 
debt instruments with other financial institutions. Such investments 
and cross holdings would be deducted from an advanced approaches 
banking organization's own tier 2 capital, as applicable.
    Some commenters expressed concerns that deducting a covered debt 
instrument from an advanced approaches banking organization's own tier 
2 capital is insufficiently restrictive. As an alternative, these 
commenters recommended that advanced approaches banking organizations 
deduct investments in covered debt instruments from their own common 
equity tier 1 capital. Some commenters suggested that the prohibition 
of all holdings of covered debt instruments by advanced approaches 
banking organizations would be more appropriate. Other commenters 
expressed concerns that deducting a covered debt instrument from an 
advanced approaches banking organization's own tier 2 capital is overly 
restrictive. These commenters asserted that a covered BHC or advanced 
approaches covered IHC should be able to effectuate deductions

[[Page 712]]

from its own TLAC-eligible long-term debt rather than its own tier 2 
capital.
    Requiring deduction of a covered debt instrument from tier 2 
capital should be a sufficiently prudent and simple approach that 
discourages advanced approaches banking organizations' investments in 
such instruments and thereby supports the objectives of reducing both 
interconnectedness within the financial system and systemic risks. 
Effectuating deductions from a covered BHC's or advanced approaches 
covered IHC's own TLAC-eligible debt, rather than own tier 2 capital, 
could disproportionately favor the largest and most internationally 
active banking organizations. A less complex banking organization, such 
as a non-GSIB advanced approaches banking organization, would make all 
deductions related to an investment in a covered debt instrument from 
its own tier 2 capital, since non-GSIBs are not required to issue TLAC-
eligible debt. Further, allowing covered BHCs and advanced approaches 
covered IHCs to deduct from their own TLAC-eligible debt creates 
additional balance sheet capacity for these banking organizations to 
invest in covered debt instruments issued by other GSIBs relative to 
non-GSIB advanced approaches banking organizations, thereby undermining 
a goal of the final rule to reduce interconnectedness among large and 
internationally active banking organizations. The disproportionate 
effects of allowing deduction from own TLAC-eligible debt would be 
further exacerbated if the agencies were to expand the scope of the 
final rule in the future as described above.
    As such, the agencies are finalizing, as proposed, the requirement 
that an advanced approaches banking organization treat an investment in 
a covered debt instrument as an investment in a tier 2 capital 
instrument, and therefore, deduct such investment from its own tier 2 
capital.

C. Amendments to Definitions

    The proposal would have added or amended certain definitions in 
section __.2 of the capital rule to implement the proposed deduction 
approach.
1. Definition of ``Covered Debt Instrument'' for Covered BHC and 
Covered IHC Issuance
    Under the proposal, a ``covered debt instrument'' would have been 
defined to include an unsecured debt instrument that is:
    (1) Issued by a covered BHC and that is an ``eligible debt 
security'' for purposes of the TLAC rule,\21\ or that is pari passu or 
subordinated to any ``eligible debt security'' issued by the covered 
BHC; or
---------------------------------------------------------------------------

    \21\ See 12 CFR 252.61.
---------------------------------------------------------------------------

    (2) Issued by a covered IHC and that is an ``eligible Covered IHC 
debt security'' for purposes of the TLAC rule,\22\ or that is pari 
passu or subordinated to any ``eligible Covered IHC debt security'' 
issued by the covered IHC.
---------------------------------------------------------------------------

    \22\ See 12 CFR 252.161.
---------------------------------------------------------------------------

    Under the proposal, a covered debt instrument would not have 
included a debt instrument that qualifies as tier 2 capital under the 
capital rule.
    Some commenters requested that pari passu or subordinated unsecured 
debt instruments be excluded from the definition of ``covered debt 
instrument.'' Commenters argued that it is not practical to determine 
whether a given instrument is pari passu or subordinated to TLAC-
eligible debt issued by a covered BHC or covered IHC and whether a 
given debt instrument was an eligible long-term debt instrument under 
the TLAC rule. Further, commenters argued that because the TLAC rule 
limits the amount of debt that a covered BHC or covered IHC can issue 
that is not TLAC-eligible but is pari passu with or subordinated to 
TLAC-eligible debt, significant amounts of such debt should not be 
outstanding.
    Treating unsecured debt instruments that are pari passu or 
subordinated to TLAC-eligible debt instruments as ``covered debt 
instruments'' is important, given that these liabilities will incur 
losses ahead of or proportionally with TLAC-eligible debt. Excluding 
these pari passu and subordinated instruments from the regulatory 
deduction treatment would understate the degree of risk of these 
investments. Advanced approaches banking organizations should be able 
to determine whether an instrument qualifies as TLAC under applicable 
standards, or whether an instrument is pari passu or subordinated to a 
company's TLAC-eligible debt instruments based on public information 
and routine due diligence. Accordingly, the agencies are finalizing as 
proposed the above prongs of the definition of covered debt instrument 
for covered BHC and covered IHC debt issuances.
2. Definition of ``Covered Debt Instrument'' for Foreign GSIB Issuance
    A ``covered debt instrument'' also would have included any 
unsecured debt instrument issued by a foreign GSIB or any of its 
subsidiaries, other than its covered IHC, for the purpose of absorbing 
losses or recapitalizing the issuer or any of its subsidiaries in 
connection with a resolution, receivership, insolvency, or similar 
proceeding of the issuer or any of its subsidiaries (foreign TLAC-
eligible debt). Further, covered debt instruments would have also 
included any debt instrument that is pari passu or subordinated to any 
foreign TLAC-eligible debt, other than an unsecured debt instrument 
that is included in the regulatory capital of the issuer.
    Commenters suggested that the scope of the definition of ``covered 
debt instrument'' should be revised to include only foreign TLAC-
eligible debt as determined under applicable home-country 
standards.\23\ Commenters stated that the proposed scope of the 
definition is broader than necessary because the issuance of such 
liabilities is subject to the Financial Stability Board (FSB)'s TLAC 
term sheet's limitation on issuance of excluded liabilities.\24\ Some 
commenters suggested that liabilities issued by foreign GSIBs that are 
``excluded liabilities'' under the FSB's TLAC term sheet should be 
excluded from the proposal's definition of covered debt instrument and 
therefore exempted from the deduction framework.\25\
---------------------------------------------------------------------------

    \23\ The Basel Committee's TLAC Holdings standard excludes from 
the definition of ``other TLAC liabilities'' instruments that are 
pari passu to (1) excluded liabilities and (2) other instruments 
that are eligible for recognition as external TLAC by virtue of the 
exemptions to the subordination requirements in the Financial 
Stability Board's TLAC term sheet. See section 66.c of the TLAC 
Holdings standard. Only a proportion of instruments that are 
eligible to be recognized as external TLAC by virtue of the 
subordination exemptions may be considered TLAC under the TLAC 
Holdings standard. The proportion equals the ratio of (1) the debt 
instruments issued by a GSIB that rank pari passu to excluded 
liabilities and that are recognized as external TLAC by the GSIB, to 
(2) the debt instruments issued by the GSIB that rank pari passu to 
excluded liabilities and that would be recognized as external TLAC 
if the subordination requirement was not applied. As stated in the 
proposal, the agencies believe that implementation of the 
proportional deduction approach used in the Basel Committee's TLAC 
Holdings standard would have introduced too much complexity and 
operational burden to the capital rule; the final rule does not 
implement the proportional deduction approach. See Basel Committee 
for Banking Supervision and Regulation, ``TLAC Holdings'' (October 
12, 2016), available at https://www.bis.org/bcbs/publ/d387.pdf. 
(TLAC Holdings standard).
    \24\ See Financial Stability Board, ``Principles on Loss-
absorbing and Recapitalisation Capacity of G-SIBs in Resolution--
Total Loss-absorbing Capacity (TLAC) Term Sheet,'' (November 9, 
2015), available at https://www.fsb.org/wp-content/uploads/TLAC-Principles-and-Term-Sheet-for-publication-final.pdf.
    \25\ Under the FSB's TLAC term sheet, ``excluded liabilities'' 
do not qualify as TLAC and therefore are not subject to deduction 
under the TLAC Holdings standard, even if they rank pari passu or 
subordinated to a TLAC instrument. Excluded liabilities include 
deposits, liabilities arising from derivatives, and structured 
notes, among other items. The TLAC rule prohibits or limits covered 
banking organizations from entering into financial arrangements that 
may compromise an orderly resolution process, including limiting the 
amount of liabilities to unaffiliated companies.

---------------------------------------------------------------------------

[[Page 713]]

    Some commenters reiterated that it is not practical for banking 
organizations to determine whether a given instrument is pari passu or 
subordinated to foreign TLAC-eligible debt as such a determination 
requires complex analyses of foreign law with respect to insolvency 
regimes and creditor hierarchies. Commenters also asserted that there 
could be unintended consequences of including instruments that are pari 
passu or subordinated to foreign TLAC-eligible debt, including 
interference with ordinary interbank transactions. As a result, banking 
organizations would make conservative assumptions and treat all 
unsecured debt instruments issued by foreign GSIBs as subject to the 
deduction framework. Therefore, commenters suggested that the final 
rule should not include instruments pari passu or subordinated to 
foreign TLAC-eligible debt in the definition of ``covered debt 
instruments.''
    For the same reasons discussed above with respect to instruments 
issued by covered BHCs and covered IHCs, the final rule defines debt 
instruments that are pari passu or subordinated to foreign TLAC-
eligible debt as ``covered debt instruments.'' As discussed, such 
instruments would incur losses ahead of or proportionally with foreign 
TLAC-eligible debt and therefore should be subject to the deduction 
framework.
    However, the agencies recognize the commenters' concerns and revise 
in two ways the definition of covered debt instruments issued by 
foreign GSIBs and their subsidiaries, other than covered IHCs. First, 
the final rule provides that an instrument is a covered debt instrument 
if it is ``eligible for use to comply with an applicable law or 
regulation'' requiring the issuance of a minimum amount of instruments 
to absorb losses or to recapitalize the issuer or any of its 
subsidiaries in connection with a resolution, receivership, insolvency, 
or similar proceeding. The proposal's definition would not have 
explicitly considered whether the instrument is eligible for use to 
comply with such a law or regulation.
    Second, the final rule revises the definition of a covered debt 
instrument to exclude certain unsecured debt instruments from the scope 
of the definition. If the issuer may be subject to a special resolution 
regime, in its jurisdiction of incorporation or organization, that 
addresses the failure or potential failure of a financial company and 
foreign TLAC-eligible debt is eligible under that special resolution 
regime to be written down or converted into equity or any other capital 
instrument, then an instrument is pari passu or subordinated to foreign 
TLAC-eligible debt if that instrument is eligible to be written down or 
converted into equity or another capital instrument under that special 
resolution regime ahead of or proportionally with any foreign TLAC-
eligible debt. These revisions reflect the FSB's TLAC term sheet's 
focus on having instruments and liabilities that should be readily 
available for bail-in, and that instruments that cannot be bailed in 
effectively rank senior to foreign TLAC-eligible debt in bail-in.\26\
---------------------------------------------------------------------------

    \26\ Generally, a resolution regime that is consistent with the 
FSB's Key Attributes of Effective Resolution Regimes for Financial 
Institutions would be a special resolution regime that addresses the 
failure or potential failure of a financial company. See Financial 
Stability Board, ``Key Attributes of Effective Resolution Regimes 
for Financial Institutions,'' (October 15, 2014), https://www.fsb.org/wp-content/uploads/r_141015.pdf. Current examples of 
special resolution regimes that address the failure or potential 
failure of a financial company are those included in the 
International Swaps and Derivatives Association (ISDA) 2015 
Universal Resolution Stay Protocol and the ISDA 2018 U.S. Resolution 
Stay Protocol. See ISDA 2015 Universal Resolution Stay Protocol 
(November 4, 2015), https://assets.isda.org/media/ac6b533f-3/5a7c32f8-pdf; ISDA 2018 U.S. Resolution Stay Protocol (July 31, 
2018), https://www.isda.org/a/CIjEE/3431552_40ISDA-2018-U.S.-Protocol-Final.pdf.
---------------------------------------------------------------------------

    These revisions should reduce the burden associated with 
determining whether unsecured debt instruments are pari passu or 
subordinated to foreign TLAC-eligible debt. For purposes of the final 
rule, an advanced approaches banking organization can rely on the terms 
of any special resolution regime and other applicable laws or 
regulations for purposes of determining the applicability of the final 
rule's deduction framework for an unsecured debt instrument. For 
example, if the applicable law or regulation specifies the seniority of 
instruments that must be issued, the advanced approaches banking 
organization can rely on that specification of seniority in determining 
whether a different instrument is pari passu or subordinated to TLAC-
eligible debt instruments.
    These revisions also address concerns raised by commenters that the 
proposal could have interfered with ordinary interbank transactions. 
For example, if the special resolution regime applicable to a foreign 
GSIB provides that deposits are excluded from bail-in, those deposits 
are not covered debt instruments subject to the final rule's deduction 
framework.
3. Other Definitions
    Similar to the measurement of investments in the capital of 
unconsolidated financial institutions, an ``investment in a covered 
debt instrument'' would have been defined in the proposal as a net long 
position in a covered debt instrument, including direct, indirect, and 
synthetic exposures to such covered debt instruments. Investments in 
covered debt instruments would have excluded underwriting positions 
held for five business days or less. In addition, the proposal would 
have amended the definitions of ``indirect exposure'' and ``synthetic 
exposure'' in the capital rule to add exposures to covered debt 
instruments.\27\ The agencies received no comments on these technical 
elements of the proposal, and are finalizing, as proposed, the 
definitions for ``investment in a covered debt instrument,'' ``indirect 
exposure,'' and ``synthetic exposure.''
---------------------------------------------------------------------------

    \27\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); and 12 CFR 
324.2 (FDIC) (``investment in the capital of an unconsolidated 
financial institution,'' ``investment in the banking organization's 
own capital instrument,'' ``indirect exposure,'' and ``synthetic 
exposure'').
---------------------------------------------------------------------------

D. Investments in Covered Banking Organizations' Own Covered Debt 
Instruments and Reciprocal Cross Holdings

    Under the agencies' capital rule, a banking organization must 
deduct from regulatory capital an investment in its own capital 
instruments and investments in the capital of other financial 
institutions that it holds reciprocally under sections __.22(c)(1) and 
(3), respectively. The proposal would have amended section 217.22(c)(1) 
to require a covered BHC or a covered IHC to deduct from tier 2 capital 
its investments in its own covered debt instruments. The proposal also 
would have amended section __.22(c)(3) to require advanced approaches 
banking organizations to deduct from tier 2 capital any investment in a 
covered debt instrument that is held reciprocally with another 
financial institution.
    As described earlier, some commenters expressed concerns that 
deducting a covered debt instrument from an advanced approaches banking 
organization's own tier 2 capital is overly restrictive, including in 
cases of deductions for investments in its own covered debt 
instruments, as applicable,

[[Page 714]]

and reciprocal cross holdings with other financial institutions. These 
commenters asserted that a covered BHC or a covered IHC should be able 
to effectuate deductions from its own TLAC-eligible long-term debt 
rather than its own tier 2 capital for these investments.
    Requiring a deduction of a covered debt instrument from tier 2 
capital for deductions related to investments in an advanced approaches 
banking organization's own covered debt instruments and reciprocal 
cross holdings should be a sufficiently prudent and simple approach 
that discourages advanced approaches banking organizations' investments 
in such instruments, as applicable, and thereby supports the objectives 
of reducing both interconnectedness within the financial system and 
systemic risks. As mentioned earlier, effectuating deductions from a 
covered BHC's or a covered IHC's own TLAC-eligible debt, rather than 
its own tier 2 capital, could disproportionately favor the largest and 
most internationally active banking organizations. As such, the 
agencies are finalizing, as proposed, that an advanced approaches 
banking organization will generally deduct investments in own covered 
debt instruments, as applicable, and reciprocal cross holdings with 
other financial institutions in covered debt instruments from its own 
tier 2 capital.
    Commenters asked that the final rule include a separate deduction 
threshold for market making activities in an advanced approaches 
banking organization's own covered debt instruments capped at five 
percent of a covered BHC's or advanced approaches covered IHC's own 
common equity tier 1 capital. Commenters stated that such a threshold 
is necessary to better facilitate deep and liquid markets for TLAC-
eligible debt instruments. Further, commenters claimed that GSIBs are 
often the biggest market makers in their own covered debt instruments 
and, under the U.S. GAAP accounting standard, their own holdings of 
covered debt instruments are not always eliminated in full in 
consolidation. In cases where a GSIB's investments in its own covered 
debt instruments are not fully extinguished, the exposure amount can be 
greater than zero and therefore subject to deduction from tier 2 
capital under the proposal.
    Commenters stated that a separate five percent threshold for market 
making in an advanced approaches banking organization's own covered 
debt instruments in the final rule would prevent a capital deduction 
for such investments. However, finalizing the rule with a separate 
threshold for investments in an advanced approaches banking 
organization's own covered debt instruments could create additional 
balance sheet capacity for covered BHCs and advanced approaches covered 
IHCs to increase their investments in covered debt instruments issued 
by other GSIBs. Such an approach would not align with the proposal's 
goal of reducing interconnectedness and systemic risks among large and 
internationally active banking organizations. Therefore, the final rule 
does not implement this suggested change.

E. Significant and Non-Significant Investments in Covered Debt 
Instruments

    Under sections __.22(c)(5) and (6) of the capital rule, an advanced 
approaches banking organization must deduct from regulatory capital 
certain investments in the capital of unconsolidated financial 
institutions. The calculation of the deduction depends on whether the 
banking organization has a ``significant'' or a ``non-significant'' 
investment, with ``significant'' defined as ownership of more than 10 
percent of the common stock of the unconsolidated financial institution 
and ``non-significant'' defined as ownership of 10 percent or less of 
the common stock of the unconsolidated financial institution.\28\ When 
a banking organization has a ``significant investment'' in an 
unconsolidated financial institution, the banking organization must 
deduct from regulatory capital any investment in the capital of the 
unconsolidated financial institution that is not in the form of common 
stock as measured on a net long basis, and the banking organization 
must also deduct from regulatory capital any investment in the capital 
of the unconsolidated financial institution in the form of common stock 
that exceeds 10 percent of the advanced approaches banking 
organization's own common equity tier 1 capital as measured on a net 
long basis.\29\ If an advanced approaches banking organization has one 
or more ``non-significant investments'' in unconsolidated financial 
institutions, it must aggregate such investments and deduct from 
regulatory capital any amount that exceeds the 10 percent threshold for 
non-significant investments, as measured on a net long basis.\30\
---------------------------------------------------------------------------

    \28\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC) (``significant investment in the capital of an unconsolidated 
financial institution'' and ``non-significant investment in the 
capital of an unconsolidated financial institution'').
    \29\ See 12 CFR 3.22(c)(6) and (d)(2)(i)(C) (OCC); 12 CFR 
217.22(c)(6) and (d)(2)(i)(C) (Board); and 12 CFR 324.22(c)(6) and 
(d)(2)(i)(C) (FDIC). In addition to the 10 percent threshold, a 
banking organization could be subject to additional deductions for 
significant investments in financial institutions in the form of 
common stock, if the amount not deducted under the 10 percent limit, 
combined with mortgage servicing assets and deferred tax assets that 
are not deducted, exceed 15 percent of the banking organization's 
common equity tier 1 capital. See 12 CFR 3.22(d) (OCC); 12 CFR 
217.22(d) (Board); and 12 CFR 324.22(d) (FDIC).
    \30\ See 12 CFR 3.22(c)(5) (OCC); 12 CFR 217.22(c)(5) (Board); 
and 12 CFR 324.2(c)(5) (FDIC).
---------------------------------------------------------------------------

    The proposal would have amended the capital rule to require an 
advanced approaches banking organization with an investment in a 
covered debt instrument issued by an unconsolidated financial 
institution to deduct the investment from tier 2 capital if the 
advanced approaches banking organization has a significant investment 
in the capital of the unconsolidated financial institution. The 
agencies received no comments on deductions for significant investments 
in the capital of an unconsolidated financial institution and are 
finalizing this aspect of the rule as proposed.
    The proposal would have amended the capital rule to require an 
advanced approaches banking organization with an investment in a 
covered debt instrument in a financial institution in which the 
advanced approaches banking organization does not also have a 
significant investment in the form of common stock to include such 
investment in the covered debt instrument in the aggregate amount of 
non-significant investments in the capital of unconsolidated financial 
institutions. As under the existing capital rule, the proposal would 
have required an advanced approaches banking organization to deduct 
from regulatory capital the amount by which the aggregate amount of 
non-significant investments in the capital of unconsolidated financial 
institutions and such covered debt instruments exceeds the 10 percent 
threshold for non-significant investments. Any investment in a covered 
debt instrument subject to deduction would have been deducted according 
to the corresponding deduction approach described below in section V.F. 
Any investment in a covered debt instrument not subject to deduction 
would have been included in risk-weighted assets, generally with a 100 
percent risk weight.
    Some commenters suggested that the agencies recalibrate the 10 
percent threshold for non-significant investments in consideration of 
the expanded scope of instruments that would be included within that 
threshold under the proposal. For

[[Page 715]]

example, some commenters asked the agencies to expand the non-
significant investments threshold to 10 percent of an advanced 
approaches banking organization's own total capital from 10 percent of 
its own common equity tier 1 capital. Changing the non-significant 
investments threshold in the manner the commenters suggested could 
undermine a main goal of the proposal--to reduce interconnectedness 
among large and internationally active banking organizations. 
Accordingly, the final rule requires an advanced approaches banking 
organization with an investment in a covered debt instrument in a 
financial institution in which the advanced approaches banking 
organization does not have a significant investment to include such 
investment in the aggregate amount of non-significant investments in 
the capital of unconsolidated financial institutions, as proposed. 
Further, the final rule requires an advanced approaches banking 
organization to deduct from regulatory capital the amount by which the 
aggregate amount of non-significant investments in the capital of 
unconsolidated financial institutions exceeds the 10 percent threshold 
for non-significant investments, as proposed.
    The proposal would have included limited exclusions from the 10 
percent threshold for non-significant investments' deduction approach. 
The exclusions would have depended on whether an advanced approaches 
banking organization is a U.S. GSIB or a subsidiary of a U.S. GSIB 
(U.S. GSIB banking organization). To help support a deep and liquid 
market for covered debt instruments, the proposal would have permitted 
U.S. GSIB banking organizations to exclude limited amounts of market 
making exposures (``excluded covered debt instruments'') from the 10 
percent threshold for non-significant investments deduction. For 
example, a U.S. GSIB could have excluded covered debt instruments from 
the aggregate amount of non-significant investments in the capital of 
unconsolidated financial institutions. The aggregate amount of the 
exclusion, measured on a gross long basis, was limited to five percent 
of the GSIB's own common equity tier 1 capital (market making 
exclusion). If the aggregate amount of excluded covered debt 
instruments were more than five percent of the common equity tier 1 
capital, then the excess over five percent would have been subject to 
deduction from tier 2 capital on a gross long basis. In addition, if an 
excluded covered debt instrument were held for more than 30 business 
days or ceased to be held in connection with market making activities, 
then the excluded covered debt instrument would have been subject to 
deduction from tier 2 capital on a gross long basis. Finally, in order 
to dissuade regulatory arbitrage, the proposal would not have allowed 
U.S. GSIB banking organizations to subsequently move ``excluded covered 
debt instruments'' from the market making exclusion to the 10 percent 
threshold for non-significant investments.
    Commenters stressed the importance of derivatives to market making 
activities in securities, particularly covered debt instruments issued 
by GSIBs. In market making transactions, U.S. GSIBs will often act as 
financial intermediaries between clients, transferring risks related to 
covered debt instruments. This risk transfer is often conducted through 
offsetting derivative transactions or directly buying and selling 
covered debt instruments. Commenters stated that this market making 
activity supports deep and liquid markets for covered debt instruments 
by allowing investors to reduce (or gain) exposure to covered debt 
instruments without actually selling (or buying) the securities. 
Derivatives are essential to such activities because they allow market 
makers to establish and hedge these exposures.
    As such, these commenters asserted that the agencies should 
eliminate the proposed 30-business-day requirement because it would 
make the proposed market making exclusion unavailable for many market 
making activities that support the depth and liquidity of the markets 
for TLAC-eligible debt, in particular synthetic exposures from 
derivatives used in market making activities. These commenters noted 
that bona fide market making activities, including derivative- and 
hedging-related activities, often involve holding exposures for longer 
than 30 business days. Commenters further indicated that the 30-
business-day requirement would also create incentives for U.S. GSIB 
banking organizations to arbitrage the final rule by exiting and 
reestablishing hedge positions to avoid a mandatory deduction from tier 
2 capital if the position is held for more than 30 business days. 
Commenters indicated that re-establishing hedge positions would result 
in costs to banking organizations and clients without reducing the 
risks associated with the transactions. Additionally, these commenters 
indicated that the vast majority of market making activity in covered 
debt instruments is in the form of derivative exposures. Therefore, 
retaining the 30-business-day requirement would arguably make the five 
percent exclusion inoperable for most market making activities in 
covered debt instruments. As an alternative to the proposed market 
making standard and the proposed 30-business-day requirement, 
commenters suggested the agencies use the regulatory framework 
implementing the Volcker Rule to identify which positions in covered 
debt instruments are held for market making purposes and eliminate the 
30-business-day requirement. These commenters stated that this approach 
would promote effectiveness, simplicity, and efficiency in the 
regulation.
    After considering commenters' suggestions to eliminate the proposed 
30-business-day requirement for market making in covered debt 
instruments, the agencies have revised the proposal by removing the 30-
business-day requirement for market making in the form of ``synthetic 
exposures'' as defined in the agencies' capital rule.\31\ Synthetic 
market making exposures, such as derivatives, may frequently be held 
for more than 30 business days. Removing the 30-business-day 
requirement for synthetic exposures would, relative to the proposal, 
better align with the proposal's goal of supporting deep and liquid 
markets for covered debt instruments by allowing synthetic exposures 
arising from market making activities to be included in the market 
making exclusion, subject to limits. As discussed, this exclusion is 
limited to five percent of common equity tier 1 capital, measured on a 
gross long basis. These limits are consistent with financial stability 
goals of avoiding asset fire sales in times of stress, encouraging 
risk-mitigating hedges, and reducing interconnectedness while still 
supporting deep and liquid markets for TLAC-eligible debt instruments. 
Accordingly, the final rule reflects this change. However, the agencies 
continue to believe that the 30-business-day requirement is an 
appropriate metric to identify market making positions in ``direct'' 
investments in covered debt instruments (i.e., holding the instrument 
on the banking organization's balance sheet) and ``indirect'' 
investments in covered debt instruments (i.e., exposure to the 
instrument through investment funds).\32\ Direct investments in covered

[[Page 716]]

debt instruments held in connection with market making should turn over 
regularly and the agencies seek to dis-incentivize long-term direct and 
indirect exposures to covered debt instruments, given the risk of 
write-down or conversion to equity of such instruments.
---------------------------------------------------------------------------

    \31\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC) (``synthetic exposure'').
    \32\ See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 
(FDIC) (``investment in the capital of an unconsolidated financial 
institution'' and ``indirect exposure'').
---------------------------------------------------------------------------

    Therefore, the final rule retains the 30-business-day requirement 
for ``direct'' and ``indirect'' investments in excluded covered debt 
instruments, but not for ``synthetic'' investments in excluded covered 
debt instruments. This change from the proposal should balance the 
goals of limiting interconnectedness among the largest and most 
internationally active banking organizations and promoting the 
liquidity of TLAC-eligible debt instruments. Additionally, the agencies 
clarify that there is no requirement under the final rule to assign 
investments in covered debt instruments held in connection with market 
making as ``excluded covered debt instruments.'' To the extent a U.S. 
GSIB banking organization has available capacity, all investments in 
covered debt instruments could be held on a net long basis as non-
significant investments in the capital of an unconsolidated financial 
institution subject to the 10 percent threshold for non-significant 
investments.
    After consideration of comments, the agencies also have revised the 
rule to use the Volcker Rule exemption for market making activities to 
identify covered debt instruments held for market making for purposes 
of qualifying for the final rule's market making exclusion. Relative to 
the proposal, this change should decrease compliance burden by allowing 
banking organizations to use a single methodology for identifying 
market making activities, rather than two similar, but non-identical 
regulatory standards.
    This approach would capture essentially the same set of exposures 
as the proposal's standard. However, the final rule's definition of 
``excluded covered debt instrument'' differs from the proposal by 
referring to the relevant provisions of each agency's rule implementing 
the market making exemption in the Volcker Rule.\33\
---------------------------------------------------------------------------

    \33\ See 12 CFR 44.4 (OCC); 12 CFR 248.4 (Board); 12 CFR 351.4 
(FDIC).
---------------------------------------------------------------------------

    The proposal also included a simpler deduction approach for 
advanced approaches banking organizations that are not U.S. GSIB 
banking organizations given that these banking organizations pose less 
systemic risks than U.S. GSIBs. Unlike a U.S. GSIB, these banking 
organizations can include any non-significant investments in covered 
debt instruments of unconsolidated financial institutions in the five 
percent exclusion (i.e., use of the exclusion is not restricted to only 
those investments held in connection to market making activities). Any 
amount in excess of this five percent exclusion would be subject to the 
10 percent threshold for non-significant investments deduction on a net 
long basis. The agencies did not receive comments on this provision of 
the proposal. Therefore, the final rule implements the five percent 
exclusion for advanced approaches banking organizations that are not 
U.S. GSIBs as proposed.
    As noted above, an advanced approaches banking organization could 
exclude certain investments in covered debt instruments, as applicable, 
from the 10 percent threshold for non-significant investments 
calculation and potential deduction under section __.22(c)(4) if the 
aggregate amount of covered debt instruments, measured by gross long 
position, were five percent or less of its common equity tier 1 
capital. To achieve consistency with the TLAC Holdings standard and 
with the calculation of the 10 percent threshold for non-significant 
investments deduction, the agencies are modifying the calculation for 
determining the amount of covered debt instruments that can be omitted 
from the 10 percent threshold for non-significant investments 
calculation. Under the final rule, an advanced approaches banking 
organization can omit covered debt instruments from the 10 percent 
threshold calculation and potential deduction under section __.22(c)(4) 
if the aggregate amount of covered debt instruments, measured by gross 
long position, is five percent or less of the sum of the banking 
organization's common equity tier 1 capital elements minus all 
deductions from and adjustments to common equity tier 1 capital 
elements required under section __.22(a) through __.22(c)(3), net of 
associated deferred tax liabilities (DTLs). This includes, for example, 
deductions related to goodwill, intangibles, and deferred tax assets, 
and adjustments related to accumulated net gains and losses on cash 
flow hedges. The agencies believe that to achieve consistency and 
clarity throughout the deduction framework, the amount of covered debt 
instruments that can be omitted from the 10 percent threshold for non-
significant investments calculation should be computed using the same 
basis as the 10 percent threshold for non-significant investments 
calculation itself.
    The agencies intend to monitor advanced approaches banking 
organizations' holdings of covered debt instruments in the form of 
synthetic exposures to ensure that the capital held for these positions 
is commensurate with risk and that such holdings do not raise safety 
and soundness concerns. Further, to better understand advanced 
approaches banking organizations' risk from exposures to the capital of 
unconsolidated financial institutions, the agencies may issue an 
information collection proposal to collect quarterly data on advanced 
approaches banking organizations' non-significant investments in the 
capital of unconsolidated financial institutions and excluded covered 
debt instruments, as applicable.
    Some commenters disagreed with the proposal's design of the 
exclusions for covered debt instruments, which measures positions on a 
gross long basis. These commenters suggested that the measurement of 
the exclusions for covered debt instruments be based on the ``net long 
position,'' in accordance with the agencies' capital rule, which allows 
gross long positions to be offset against qualifying short 
positions.\34\ The commenters noted that the 10 percent threshold for 
non-significant investments is based on the ``net long position'' and 
suggested that the exclusions for covered debt instrument be consistent 
with that standard. Further, commenters stated that finalizing the 
exclusions for covered debt instruments based on a net long position 
measurement basis would allow advanced approaches banking organizations 
to better support the depth and liquidity of market making in TLAC-
eligible debt instruments, because market making activities are 
typically well hedged and a ``net long position'' would allow more 
positions to qualify for the exclusions.
---------------------------------------------------------------------------

    \34\ See 12 CFR 3.22(h) (OCC); 12 CFR 217.22(h) (Board); 12 CFR 
324.22(h) (FDIC).
---------------------------------------------------------------------------

    The final rule maintains measurement of the exclusions for covered 
debt instruments based on the gross long position. Moving to a ``net 
long position'' measurement could undermine the agencies' goal of 
reducing interconnectedness among large and internationally active 
banking organizations as it would allow such banking organizations to 
accumulate exposure to covered debt instruments significantly beyond 
the threshold envisioned in the proposal. Further, advanced approaches 
banking

[[Page 717]]

organizations are able to assign hedged covered debt instrument 
exposures to the 10 percent threshold for non-significant investments 
on a net long basis. The optional exclusions remain available to 
support market making activities such as accumulating short term cash 
positions to meet customer demand and to acquire additional long 
positions in covered debt instruments to facilitate market 
stabilization during times of stress. Such an approach is consistent 
with financial stability goals of avoiding asset fire sales in times of 
stress, encouraging risk-mitigating hedges, and reducing 
interconnectedness while still supporting deep and liquid markets for 
TLAC-eligible debt instruments.

F. Corresponding Deduction Approach

    Under the corresponding deduction approach, a banking organization 
must apply any required deduction to the component of capital for which 
the underlying instrument would qualify if it were issued by the 
banking organization.\35\ If the banking organization does not have 
enough of the component of capital to fully effect the deduction, the 
corresponding deduction approach provides that any amount of the 
investment that has not already been deducted would be deducted from 
the next, more subordinated component of capital.\36\ If, for example, 
a banking organization has insufficient amounts of tier 2 capital and 
additional tier 1 capital to effect a required deduction, the banking 
organization would need to deduct from common equity tier 1 capital the 
amount of the investment that exceeds the tier 2 and additional tier 1 
capital of the banking organization.\37\ The proposal would have 
amended the corresponding deduction approach in section __.22(c)(2) of 
the capital rule to specify that an investment in a covered debt 
instrument by an advanced approaches banking organization would have 
been subject to the corresponding deduction approach, with the covered 
debt instrument treated as a tier 2 capital instrument. Some commenters 
disagreed with this approach and, instead, asked the agencies to treat 
investments in covered debt instruments as a common equity tier 1 
capital instrument or, as applicable, allow deductions under the 
corresponding deduction approach from own TLAC-eligible debt 
instruments.
---------------------------------------------------------------------------

    \35\ See 12 CFR 3.22(c)(2) (OCC); 12 CFR 217.22(c)(2) (Board); 
and 12 CFR 324.22(c)(2) (FDIC).
    \36\ See 12 CFR 3.22(c)(2) and (f) (OCC); 12 CFR 217.22(c)(2) 
and (f) (Board); and 12 CFR 324.22(c)(2) and (f) (FDIC).
    \37\ See 12 CFR 3.22(f) (OCC); 12 CFR 217.22(f) (Board); and 12 
CFR 324.22(f) (FDIC).
---------------------------------------------------------------------------

    As stated earlier, requiring a deduction of a covered debt 
instrument from tier 2 capital should serve as a sufficiently prudent 
and simple approach that dis-incentivizes advanced approaches banking 
organizations' investments in such instruments and thereby supports the 
objectives of reducing both interconnectedness within the financial 
system and systemic risks. Accordingly, the agencies are finalizing the 
proposal's amendments to the corresponding deduction approach in 
section __.22(c)(2) of the capital rule

G. Net Long Position Calculation

    The proposal would have followed the same general approach as 
currently provided under the agencies' capital rule regarding the 
calculation of the amount of any deduction and the treatment of 
guarantees and indirect investments for purposes of the deductions. 
Under the capital rule, the amount of a banking organization's 
investment in its own capital instrument or in the capital of an 
unconsolidated financial institution subject to deduction is the 
banking organization's net long position in the capital instrument as 
calculated under section __.22(h) of the capital rule. Under section 
__.22(h), a banking organization may net certain qualifying short 
positions in a capital instrument against a gross long position in the 
same instrument to determine the net long position.
    The proposal would have modified section __.22(h) of the capital 
rule such that an advanced approaches banking organization would 
determine its net long position in an exposure to its own covered debt 
instrument, as applicable, or in a covered debt instrument issued by an 
unconsolidated financial institution in the same manner as currently 
provided for investments in an institution's own capital instruments or 
investments in the capital of an unconsolidated financial institution, 
respectively. Consistent with the capital rule, the calculation of a 
net long position under the proposal would have taken into account 
direct investments in covered debt instruments as well as indirect 
exposures to covered debt instruments held through investment funds.
    A banking organization has three options under the capital rule to 
measure its gross long position in a capital instrument held indirectly 
through an investment fund.\38\ The proposal would have amended section 
__.22(h)(2)(iii) of the capital rule to provide the same three options 
to determine the gross long position in a covered debt instrument held 
through an investment fund. The agencies received no comments on this 
aspect of the proposal and the final rule adopts the changes as 
proposed.
---------------------------------------------------------------------------

    \38\ See 12 CFR 3.22(h)(2)(iii) (OCC); 12 CFR 217.12(h)(2)(iii) 
(Board); and 12 CFR 324.22(h) (2)(iii) (FDIC).
---------------------------------------------------------------------------

    The agencies' capital rule sets qualifying criteria for recognizing 
short positions that can be netted against gross long positions; 
specifically, a short position must be in the ``same instrument'' as 
the gross long position and must meet minimum maturity requirements, 
among other requirements.\39\ The proposal would not have changed these 
operational criteria for recognizing short positions in the calculation 
of a net long position. Some commenters advocated for changes to the 
capital rule's requirements for recognizing a short position under 
section __.22(h)(3). These commenters argued that the capital rule 
should be modified to not require short positions to be in the ``same 
instrument'' as the gross long position when calculating the net long 
position. Instead, commenters recommended that the final rule allow 
recognized short positions to be in any instrument that is pari passu 
or subordinated to the gross long position's instrument. These 
commenters recommended that this change should also apply to 
calculating the net long position of investments in covered debt 
instruments in the final rule.
---------------------------------------------------------------------------

    \39\ See 12 CFR 3.22(h)(3) (OCC); 12 CFR 217.12(h)(3) (Board); 
and 12 CFR 324.22(h)(3) (FDIC).
---------------------------------------------------------------------------

    The agencies have consistently maintained that recognition of short 
positions under the net long position calculation are required to be in 
the ``same instrument'' as a matter of prudent risk management and 
hedging practices. To recognize short positions in other than the 
``same instrument'' would potentially undermine the effectiveness of 
risk mitigating hedges. Accordingly, the final rule adopts the 
calculation of the net long position as proposed.
    Under the proposal, for purposes of any deduction required for an 
advanced approaches banking organization's investment in the capital of 
an unconsolidated financial institution, the amount of a covered debt 
instrument would have included any contractual obligations the advanced 
approaches banking organization has to purchase such covered debt 
instruments. The

[[Page 718]]

agencies received no comment on this aspect of the proposal, and the 
final rule adopts this change as proposed.

VI. Technical Amendment and Other Comments

    The agencies proposed amending the definition of ``investment in 
the capital of an unconsolidated financial institution'' in section 
__.2 of the capital rule to correct a drafting error in that 
definition. The agencies did not receive any comment with regard to the 
proposed technical amendment. However, in the period between the 
issuance of the proposal and this final rule, this technical amendment 
was implemented by the agencies' final rule to simplify the capital 
rule.\40\
---------------------------------------------------------------------------

    \40\ See 84 FR 35234 (July 22, 2019).
---------------------------------------------------------------------------

    A few commenters suggested that the proposal should go further in 
limiting the exposure of advanced approaches banking organizations to 
GSIBs, given their size and the risk their failure could pose to the 
financial system. These commenters argued that the final rule should 
ensure that the cost of TLAC debt better reflect heightened risks of 
GSIBs and that the agencies should require U.S. GSIBs to hold more 
common equity tier 1 capital. Other commenters suggested that the 
agencies consider existing elements of the regulatory framework--such 
as the single counterparty credit limit and the GSIB surcharge--when 
finalizing the deduction framework.
    Under the capital rule, each agency has the authority to require a 
banking organization to hold additional capital based on the banking 
organization's risk profile.\41\ Similarly, while other elements of the 
regulatory framework address the systemic risks of large, 
internationally active banking organizations or concentrations of 
exposures to counterparties, no existing regulation specifically 
address the risks associated with investments in TLAC-eligible debt 
instruments. The agencies, therefore, are finalizing the proposal to 
establish a regulatory capital treatment for investments in covered 
debt instruments with certain modifications, as previously described.
---------------------------------------------------------------------------

    \41\ See 12 CFR 3.1(d)(1) (OCC); 12 CFR 217.1(d)(1) (Board); 12 
CFR 324.1(d)(1) (FDIC).
---------------------------------------------------------------------------

    The proposal did not contemplate providing a transition period for 
implementation of the final rule by advanced approaches banking 
organizations. Some commenters requested that the agencies provide 
banking organizations with a transition period to ease compliance 
burden. Specifically, commenters requested that the agencies provide 18 
months before banking organizations must effectuate the deduction 
treatment. These commenters asserted that a transition period would 
give banking organizations more time to build out systems to track 
which instruments are covered debt instruments and therefore subject to 
the deduction framework. A commenter requested that the agencies not 
require deduction of any unsecured debt instrument issued by a GSIB 
until the information necessary to determine whether the instrument is 
a covered debt instrument is available.
    The agencies maintain the supervisory expectation that large and 
internationally active banking organizations should be deeply 
knowledgeable of the securities exposures on their own balance sheets, 
if only for the purposes of prudent risk management. The final rule 
will become effective on April 1, 2021. The agencies believe this 
effective date provides sufficient time for advanced approaches banking 
organizations to evaluate investments in covered debt instruments and 
apply the final rule's deduction treatment.
    In addition to the above, the agencies are making certain technical 
amendments to section __.10 of the capital rule to more clearly 
differentiate between requirements applicable to advanced approaches 
banking organizations and those applicable to Category III banking 
organizations. In section __.10 of the capital rule, as amended by the 
recent interagency tailoring rule,\42\ paragraphs (c)(1)-(3) describe 
the capital ratio calculations applicable to advanced approaches 
banking organizations, whereas paragraph 10(c)(4) of the capital rule 
describes the supplementary leverage ratio calculations applicable to 
both advanced approaches banking organizations and Category III banking 
organizations. To avoid confusion, the agencies are amending section 
__.10 of the capital rule such that paragraph (c) will provide only the 
supplementary leverage ratio requirements. The advanced approaches 
capital calculations will be moved to revised paragraph (d) of section 
__.10 of the capital rule. Current paragraph (d), Capital adequacy, 
will be re-designated as paragraph (e) of section __.10 of the capital 
rule. The agencies are also amending language in sections __.2 and 
__.121 of the capital rule to correct cross-references in light of the 
amendments described above. These technical amendments do not amend any 
substantive requirements applicable to banking organizations.
---------------------------------------------------------------------------

    \42\ 84 FR 59230 (November 1, 2019).
---------------------------------------------------------------------------

VII. Amendments to the Board's TLAC Rule

    In 2018, the Board issued a notice of proposed rulemaking that, 
among other items, included minor proposed amendments to the Board's 
TLAC rule.\43\ The proposal included revisions to ensure that the 
external TLAC risk-weighted buffer level, TLAC leverage buffer level, 
and the TLAC buffer level for covered IHCs would be amended to use the 
same haircuts applicable to LTD instruments that are currently used to 
calculate outstanding minimum required TLAC amounts, which do not 
include a 50 percent haircut on LTD instruments with a remaining 
maturity of between one and two years. Another proposed amendment was 
to ensure that the term ``external TLAC risk-weighted buffer'' is used 
consistently in the TLAC rule. The proposal also would have provided 
that a new covered IHC would always have three years to conform to most 
of the requirements of the TLAC rule, and to align the articulation of 
the methodology for calculating the covered IHC's LTD instrument amount 
with the same methodology used for GSIBs.
---------------------------------------------------------------------------

    \43\ 83 FR 17317, 17322 (April 19, 2018).
---------------------------------------------------------------------------

    The Board received minimal comments on these proposed revisions to 
the TLAC rule within the comments received on its proposal overall and 
the comments received were supportive of the specific proposed 
revisions. As a result, the Board is issuing these revisions in the 
final rule without change from the proposal.

VIII. Changes to Regulatory Reporting

A. Deductions From Tier 2 Capital Related to Investments in Covered 
Debt Instruments and Excluded Covered Debt Instruments

    In the April 2019 rulemaking, the Board proposed to modify the 
instructions to the Consolidated Financial Statements for Holding 
Companies (FR Y-9C), Schedule HC-R, Part I and Part II, to effectuate 
the deductions from regulatory capital for Board-regulated advanced 
approaches banking organizations related to investments in covered debt 
instruments and excluded covered debt instruments as described in the 
proposal.
    Specifically, the Board would have modified the instructions of the 
FR Y-9C for Schedule HC-R, Part I, item 33, ``Tier 2 capital 
deductions.'' On the FR Y-9C, a covered BHC would have been required to 
deduct from tier 2 capital

[[Page 719]]

the aggregate amount of its investments in covered debt instruments 
that, when combined with the banking organization's other non-
significant investments in the capital of unconsolidated financial 
institutions, exceed 10 percent of the common equity tier 1 capital of 
the banking organization. Also, if an excluded covered debt instrument 
were held by a covered BHC for more than 30 business days, or no longer 
held in connection with market making-related activities, the excluded 
covered debt instrument would have been deducted from tier 2 capital.
    In addition, for purposes of the deduction requirements related to 
non-significant investments in the capital of unconsolidated financial 
institutions, Board-regulated advanced approaches banking organizations 
that are not covered BHCs would have been required to deduct from tier 
2 capital those investments in covered debt instruments that exceed 
five percent of common equity tier 1 capital, and that also, when 
combined with the banking organization's other non-significant 
investments in unconsolidated financial institutions, exceed 10 percent 
of the common equity tier 1 capital of the banking organization. The 
Board also would have modified the instructions for calculating other 
deduction-related and risk-weighted asset line items to incorporate 
investments in covered debt instruments and excluded covered debt 
instruments, as applicable, by Board-regulated advanced approaches 
banking organizations.
    In October 2019, the Federal Financial Institutions Examination 
Council (FFIEC) separately proposed to modify the Consolidated Reports 
of Condition and Income for a Bank with Domestic and Foreign Offices 
(FFIEC 031), Consolidated Reports of Condition and Income for a Bank 
with Domestic Offices Only (FFEIC 041) (collectively with the FFIEC 
031, the Call Report),\44\ and Regulatory Capital Reporting for 
Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 
101) in a manner consistent with the changes described above to the FR 
Y-9C to effectuate the proposal's deduction approach for investments in 
covered debt instruments and excluded covered debt instruments, as 
applicable.\45\
---------------------------------------------------------------------------

    \44\ The proposed modifications would not affect the 
Consolidated Reports of Condition and Income for a Bank with 
Domestic Offices Only and Total Assets Less than $1 Billion (FFIEC 
051) because banks and savings associations that are advanced 
approaches banking organizations are not eligible to file the FFIEC 
051 report.
    \45\ See 84 FR 53227 (October 4, 2019).
---------------------------------------------------------------------------

    In March 2020, the Board separately proposed conforming changes to 
the FR Y-14 to effectuate the proposed deduction framework for 
investments in covered debt instruments.\46\
---------------------------------------------------------------------------

    \46\ See 85 FR 15776 (March 19, 2020).
---------------------------------------------------------------------------

    With respect to the FR Y-9C proposed changes, one commenter 
requested clarification on the sequencing of reporting changes related 
to effectuating deductions for covered debt instruments and the 
effective date of the final rule. Specifically, this commenter 
requested that the effective date of the final rule should precede any 
requirement to begin effectuating deductions related to investments in 
covered debt instruments on regulatory reports. The agencies confirm 
that the effective date of the final rule will precede any reporting 
requirements related to implementing the deduction framework for 
covered debt instruments. The Board received no comments on the FR Y-14 
proposed changes.
    As described above, reporting changes to effectuate the deduction 
framework for investments in covered debt instruments described in the 
proposal were proposed separately for the (1) FR Y-9C, (2) FFIEC 101 
and Call Report, and (3) FR Y-14. The Board is finalizing as proposed, 
changes to the FR Y-9C and FR Y-14, to effectuate the deduction 
framework for investments in covered debt instruments in this Federal 
Register notice. The agencies will address comments submitted in 
connection with the FFIEC's October 2019 proposal when those forms and 
instructions are finalized in a separate Federal Register notice, 
consistent with the final rule.

B. Public Disclosure of Long-Term Debt and TLAC by Covered BHCs and 
Covered IHCs

    In the April 2019 rulemaking, the Board also proposed to modify 
Schedule HC-R, Part I of the FR Y-9C by adding new data items that 
would publicly disclose: (1) The long-term debt and TLAC for covered 
BHCs and covered IHCs; (2) these banking organizations' long-term debt 
and TLAC ratios to ensure compliance with the TLAC rule; (3) TLAC 
buffers; and (4) amendments to the instructions for the calculation of 
eligible retained income (item 47), institution-specific capital buffer 
(items 46.a and 46.b), and distributions and discretionary bonus 
payments (item 48) for covered BHCs and covered IHCs.\47\ Commenters 
suggested that the Board clarify in the final rule when changes to FR 
Y-9C related to long-term debt and TLAC reporting disclosures will 
become effective. Reporting changes for deductions related to 
investments in covered debt instruments on the FR Y-9C will not go into 
effect until after the final rule's effective date.
---------------------------------------------------------------------------

    \47\ See 84 FR 13823-13824 (April 8, 2019).
---------------------------------------------------------------------------

    In March 2020, the Board separately proposed conforming changes to 
the FR Y-14 to disclose new items related to long-term debt and TLAC, 
as described above.\48\
---------------------------------------------------------------------------

    \48\ See 85 FR 15776 (March 19, 2020).
---------------------------------------------------------------------------

    In response to the proposal, commenters requested that the Board 
clarify how U.S. GSIBs are to calculate the TLAC rule's leverage ratios 
on the FR Y-9C report. More specifically, commenters suggested the 
Board clarify that U.S. GSIBs should not be required to report long-
term debt and TLAC leverage ratios based on total assets because U.S. 
GSIBs' applicable long-term debt and TLAC leverage requirement is based 
on the denominator for the supplementary leverage ratio. Commenters 
noted that only covered IHCs are required to report the long-term debt 
and TLAC leverage ratios based on total assets. The Board confirms that 
reporting of the long-term debt and TLAC leverage requirement for U.S. 
GSIBs will only be based upon the supplementary leverage ratio 
denominator, consistent with the TLAC rule's leverage requirement. The 
Board received no comments on the FR Y-14 proposed changes.
    The Board is finalizing the proposed changes to the FR Y-9C and FR 
Y-14 to require covered BHCs and covered IHCs to report their long-term 
debt and TLAC resources, with modifications in response to comment as 
described above, in this Federal Register notice.
    Some commenters suggested the Board develop a more robust 
disclosure regime related to TLAC so that the level of risk is 
appropriately priced into these instruments. They stated that 
disclosures will incentivize GSIBs to meet their TLAC requirements with 
equity rather than debt instruments. Commenters offered suggestions for 
improving disclosures by noting that the agencies should collaborate 
with the Securities and Exchange Commission to require plain-language 
warnings regarding risk of bail-in to investors (1) when purchasing a 
TLAC instrument in their brokerage account and (2) in offering 
materials published by pension and mutual funds that invest in TLAC 
instruments. The Board does not have the authority to change 
disclosures required by the Securities and Exchange Commission related 
to securities issuances or sales to retail investors. The interagency 
statement on retail sales of nondeposit investments

[[Page 720]]

products should ensure certain disclosures for retail sales programs 
involving mutual funds, annuities and other nondeposit investment 
products.\49\ Further, the Board does not have the authority to mandate 
disclosures by pension or mutual funds. The final rule does not 
incorporate these suggestions.
---------------------------------------------------------------------------

    \49\ See ``Interagency Statement on Retail Sales of Nondeposit 
Investment Products.'' OCC Bulletin 1994-13 (OCC); SR 94-11 (FIS) 
(Board); and FIL-9-94 (FDIC).
---------------------------------------------------------------------------

IX. Regulatory Analyses

A. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(PRA).\50\ In accordance with the requirements of the PRA, the agencies 
may not conduct or sponsor, and the respondent is not required to 
respond to, an information collection unless it displays a currently-
valid Office of Management and Budget (OMB) control number.
---------------------------------------------------------------------------

    \50\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

    The final rule revises section __.22(c), (f), and (h) of the 
capital rule to incorporate the proposed deduction approach for 
investments in covered debt instruments. Several new definitions are 
added to section __.2 to effectuate these deductions.
    Each agency has an information collection related to its regulatory 
capital rules. The OMB control number for the OCC is 1557-0318, Board 
is 7100-0313, and FDIC is 3064-0153. The final rule will not, however, 
result in changes to burden under these information collections and 
therefore no submissions will be made under section 3507(d) of the PRA 
(44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing 
regulations (5 CFR 1320) for each of the agencies' regulatory capital 
rules.
    In addition, the final rule requires changes to the Call Reports 
(OMB No. 1557-0081 (OCC), 7100-0036 (Board), and 3064-0052 (FDIC)), and 
the FFIEC 101 (OMB No. 1557-0239 (OCC), 7100-0319 (Board), and 3064-
0159 (FDIC)), which will be addressed in one or more separate Federal 
Register notices.
    The final rule requires changes to the Consolidated Financial 
Statements for Holding Companies (FR Y-9C; OMB No. 7100-0128) and the 
Capital Assessments and Stress Testing Reports (FR Y-14A/Q/M; OMB No. 
7100-0341). The Board reviewed the final rule under the authority 
delegated to the Board by OMB.
Revised Collection (Board only)
    Title of Information Collection: Consolidated Financial Statements 
for Holding Companies.
    Agency form number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR 
Y-9CS.
    OMB control number: 7100-0128.
    Effective date: June 30, 2021.
    Frequency: Quarterly, semiannually, and annually.
    Affected Public: Businesses or other for-profit.
    Respondents: Bank holding companies (BHCs), savings and loan 
holding companies (SLHCs), securities holding companies (SHCs), and 
U.S. Intermediate Holding Companies (IHCs) (collectively, holding 
companies (HCs)).
    Estimated number of respondents: FR Y-9C (non-advanced approaches 
(AA) HCs community bank leverage ratio (CBLR)) with less than $5 
billion in total assets--71, FR Y-9C (non AA HCs CBLR) with $5 billion 
or more in total assets--35, FR Y-9C (non AA HCs non-CBLR) with less 
than $5 billion in total assets--84, FR Y-9C (non AA HCs non-CBLR) with 
$5 billion or more in total assets--154, FR Y-9C (AA HCs)--19, FR Y-
9LP--434, FR Y-9SP--3,960, FR Y-9ES--83, FR Y-9CS--236.
    Estimated average hours per response:
Reporting
    FR Y-9C (non AA HCs CBLR) with less than $5 billion in total 
assets--29.17, FR Y-9C (non AA HCs CBLR) with $5 billion or more in 
total assets--35.14, FR Y-9C (non AA HCs non-CBLR) with less than $5 
billion in total assets--41.01, FR Y-9C (non AA HCs non-CBLR) with $5 
billion or more in total assets--46.98, FR Y-9C (AA HCs)--49.30, FR Y-
9LP--5.27, FR Y-9SP--5.40, FR Y-9ES--0.50, FR Y-9CS--0.50.
Recordkeeping
    FR Y-9C (non-advanced approaches HCs with less than $5 billion in 
total assets), FR Y-9C (non-advanced approaches HCs with $5 billion or 
more in total assets), FR Y-9C (advanced approaches HCs), and FR Y-9LP: 
1.00 hour; FR Y-9SP, FR Y-9ES, and FR Y-9CS: 0.50 hours.
    Estimated annual burden hours:
Reporting
    FR Y-9C (non AA HCs CBLR) with less than $5 billion in total 
assets--8,284, FR Y-9C (non AA HCs CBLR) with $5 billion or more in 
total assets--4,920, FR Y-9C (non AA HCs non-CBLR) with less than $5 
billion in total assets--13,779, FR Y-9C (non AA HCs non-CBLR) with $5 
billion or more in total assets--28,940, FR Y-9C (AA HCs)--3,747, FR Y-
9LP--9,149, FR Y-9SP--42,768, FR Y-9ES--42, FR Y-9CS--472.
Recordkeeping
    FR Y-9C--1,452, FR Y-9LP--1,736, FR Y-9SP--3,960, FR Y-9ES--42, FR 
Y-9CS--472.
    General description of report: The FR Y-9 family of reporting forms 
continues to be the primary source of financial data on holding 
companies (HCs) on which examiners rely between on-site inspections. 
Financial data from these reporting forms is used to detect emerging 
financial problems, review performance, conduct pre-inspection 
analysis, monitor and evaluate capital adequacy, evaluate HC mergers 
and acquisitions, and analyze an HC's overall financial condition to 
ensure the safety and soundness of its operations. The FR Y-9C serves 
as the standardized financial statements for certain consolidated 
holding companies. The Board requires HCs to provide standardized 
financial statements to fulfill the Board's statutory obligation to 
supervise these organizations. HCs file the FR Y-9C on a quarterly 
basis.
    Legal authorization and confidentiality: The reporting and 
recordkeeping requirements associated with the FR Y-9 series of reports 
are authorized for BHCs pursuant to section 5 of the Bank Holding 
Company Act (``BHC Act''); for SLHCs pursuant to section 10(b)(2) and 
(3) of the Home Owners' Loan Act, 12 U.S.C. 1467a(b)(2) and (3), as 
amended by sections 369(8) and 604(h)(2) of the Dodd-Frank Wall Street 
and Consumer Protection Act (``Dodd-Frank Act''); for IHCs pursuant to 
section 5 of the BHC Act, as well as pursuant to sections 102(a)(1) and 
165 of the Dodd-Frank Act; and for securities holding companies 
pursuant to section 618 of the Dodd-Frank Act. Except for the FR Y-9CS 
report, which is expected to be collected on a voluntary basis, the 
obligation to submit the remaining reports in the FR Y-9 series of 
reports and to comply with the recordkeeping requirements set forth in 
the respective instructions to each of the other reports, is mandatory.
    With respect to the FR Y-9C report, Schedule HI's Memoranda item 
7(g) ``FDIC deposit insurance assessments,'' Schedule HC-P's item 7(a) 
``Representation and warranty reserves for 1-4 family residential 
mortgage loans sold to U.S. government agencies and government 
sponsored agencies,'' and Schedule HC-P's item 7(b) ``Representation 
and warranty reserves for 1-4 family residential mortgage loans sold to 
other parties'' are considered confidential commercial and

[[Page 721]]

financial information. Such treatment is appropriate under exemption 4 
of the Freedom of Information Act (``FOIA''), because these data items 
reflect commercial and financial information that is both customarily 
and actually treated as private by the submitter, and which the Board 
has previously assured submitters will be treated as confidential. It 
also appears that disclosing these data items may reveal confidential 
examination and supervisory information, and in such instances, the 
information also would be withheld pursuant to exemption 8 of the FOIA, 
which protects information related to the supervision or examination of 
a regulated financial institution.
    In addition, for both the FR Y-9C report and the FR Y-9SP report, 
Schedule HC's Memoranda item 2.b., the name and email address of the 
external auditing firm's engagement partner, is considered confidential 
commercial information and protected by exemption 4 of the FOIA, if the 
identity of the engagement partner is treated as private information by 
HCs. The Board has assured respondents that this information will be 
treated as confidential since the collection of this data item was 
proposed in 2004.
    Additionally, items on the FR Y-9C, Schedule HC-C for loans 
modified under Section 4013, data items Memorandum items 16.a, ``Number 
of Section 4013 loans outstanding''; and Memorandum items 16.b, 
``Outstanding balance of Section 4013 loans'' are considered 
confidential. While the Board generally makes institution-level FR Y-9C 
report data publicly available, the Board is collecting Section 4013 
loan information as part of condition reports for the impacted HCs and 
the Board considers disclosure of these items at the HC level would not 
be in the public interest. Such information is permitted to be 
collected on a confidential basis, consistent with 5 U.S.C. 552(b)(8). 
In addition, holding companies may be reluctant to offer modifications 
under Section 4013 if information on these modifications made by each 
holding company is publicly available, as analysts, investors, and 
other users of public FR Y-9C report information may penalize an 
institution for using the relief provided by the CARES Act. The Board 
may disclose Section 4013 loan data on an aggregated basis, consistent 
with confidentiality or as otherwise required by law.
    Aside from the data items described above, the remaining data items 
collected on the FR Y-9C report and the FR Y-9SP report are generally 
not accorded confidential treatment. The data items collected on FR Y-
9LP, FR Y-9ES, and FR Y-9CS reports, are also generally not accorded 
confidential treatment. As provided in the Board's Rules Regarding 
Availability of Information, however, a respondent may request 
confidential treatment for any data items the respondent believes 
should be withheld pursuant to a FOIA exemption. The Board will review 
any such request to determine if confidential treatment is appropriate, 
and will inform the respondent if the request for confidential 
treatment has been granted or denied.
    To the extent the instructions to the FR Y-9C, FR Y-9LP, FR Y-9SP, 
and FR Y-9ES reports each respectively direct the financial institution 
to retain the workpapers and related materials used in preparation of 
each report, such material would only be obtained by the Board as part 
of the examination or supervision of the financial institution. 
Accordingly, such information is considered confidential pursuant to 
exemption 8 of the FOIA. In addition, the workpapers and related 
materials may also be protected by exemption 4 of the FOIA, to the 
extent such financial information is treated as confidential by the 
respondent.
    Current Actions: As discussed in detail in section VIII above, 
several comments were received on the proposed changes to the FR Y-9C. 
Commenters requested that the effective date of the final rule precede 
proposed changes to regulatory reports. The agencies confirmed that the 
final rule will be effective before changes are implemented to 
regulatory reports. The final rule is effective April 1, 2021, and the 
changes to the FR Y-9C are effective June 30, 2021. Also, commenters 
requested that the Board clarify that U.S. GSIBs will report long-term 
debt and TLAC leverage requirements based upon the supplementary 
leverage ratio denominator. The Board agreed and clarified this 
requirement. Finally, some commenters suggested that the Board develop 
a more robust disclosure regime related to TLAC, including 
collaborating with the SEC. The Board did not accept this comment for 
the reasons noted above. Some of the item numbers below have changed 
since the proposed rule due to other FR Y-9C reporting changes to 
Schedule HC-R that have been implemented since that time.
    To implement the reporting requirements of the final rule, the 
Board revises the FR Y-9C, Schedule HC-R, Part I, Regulatory Capital 
Components and Ratios, to amend instructions for line items 11, 17, 24, 
and 43 to effectuate the deductions from regulatory capital for 
advanced approaches holding companies related to investments in covered 
debt instruments and excluded covered debt instruments as described 
above. Further, the Board proposes to revise the FR Y-9C, Schedule HC-
R, Part II, Risk-Weighted Assets, to amend instructions for line items 
2(a), 2(b), 7, and 8 to incorporate investments in covered debt 
instruments and excluded debt instruments, as applicable, by advanced 
approaches holding companies in their calculation of risk-weighted 
assets.
    In addition, the Board revises the FR Y-9C, Schedule HC-R, Part I, 
Regulatory Capital Components and Ratios, to create new line items and 
instructions to allow the BHCs of U.S. GSIBs and the IHCs of foreign 
GSIBs to publicly report their long-term debt (LTD) and total loss-
absorbing capacity (TLAC) in accordance, respectively, with 12 CFR part 
252, subpart G and 12 CFR part 252, subpart P. Specifically, new line 
items are created to report, as applicable, BHCs of U.S GSIBs' and IHCs 
of foreign GSIBs' (1) outstanding eligible LTD (item 50); (2) TLAC 
(item 51); (3) LTD standardized risk-weighted asset ratio (item 52, 
column A); (4) TLAC standardized risk-weighted asset ratio (item 52, 
column B); (5) LTD advanced approaches risk-weighted asset ratio (item 
53, column A); (6) TLAC advanced approaches risk-weighted asset ratio 
(item 53, column B); (7) IHCs of foreign GSIBs only: LTD leverage ratio 
(item 54, column A); (8) IHCs of foreign GSIBs only: TLAC leverage 
ratio (item 54, column B); (9) LTD supplementary leverage ratio (item 
55, column A); (10) TLAC supplementary leverage ratio (item 55, column 
B); (11) institution-specific TLAC risk-weighted asset buffer necessary 
to avoid limitations on distributions and discretionary bonus payments 
(item 57(a)); and (12) TLAC leverage buffer necessary to avoid 
limitations on distributions and discretionary bonus payments (item 
57(b)). Existing line items 50(a), 50(b), 51, 52, and 53 are re-
numbered to 56(a), 56(b), 58, 59, and 60, respectively, and 
instructions' references updated, to account for the proposed inclusion 
of the new data collection items described above. Finally, the 
instructions for re-numbered line item 59, ``Distributions and 
discretionary bonus payments during the quarter,'' are amended for the 
BHCs of U.S. GSIBs and the IHCs of foreign GSIBs to reflect maximum 
payout amounts that take into account a firm's TLAC risk-weighted and 
leverage buffers reported in line items 57(a) and 57(b), respectively. 
The final

[[Page 722]]

reporting forms and instructions will become available in the near 
future on the Board's public website at https://www.federalreserve.gov/apps/reportforms/review.aspx.
Revised Collection (Board only)
    Title of Information Collection: Capital Assessments and Stress 
Testing Reports.
    Agency form number: FR Y-14A/Q/M.
    OMB control number: 7100-0341.
    Effective date: June 30, 2021.
    Frequency: Annually, quarterly, and monthly.
    Respondents: These collections of information are applicable to 
bank holding companies (BHCs), U.S. intermediate holding companies 
(IHCs), and savings and loan holding companies (SLHCs) \51\ with $100 
billion or more in total consolidated assets, as based on: (i) The 
average of the firm's total consolidated assets in the four most recent 
quarters as reported quarterly on the firm's Consolidated Financial 
Statements for Holding Companies (FR Y-9C; OMB No. 7100- 0128); or (ii) 
if the firm has not filed an FR Y-9C for each of the most recent four 
quarters, then the average of the firm's total consolidated assets in 
the most recent consecutive quarters as reported quarterly on the 
firm's FR Y-9Cs. Reporting is required as of the first day of the 
quarter immediately following the quarter in which the respondent meets 
this asset threshold, unless otherwise directed by the Board.
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    \51\ SLHCs with $100 billion or more in total consolidated 
assets became members of the FR Y- 14Q and FR Y-14M panels effective 
June 30, 2020, and will join the FR Y-14A panel effective December 
31, 2020. See 84 FR 59032 (November 1, 2019).
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    Estimated number of respondents: FR Y-14A/Q: 36; FR Y-14M: 34.\52\
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    \52\ The estimated number of respondents for the FR Y-14M is 
lower than for the FR Y-14Q and FR Y- 14A because, in recent years, 
certain respondents to the FR Y-14A and FR Y-14Q have not met the 
materiality thresholds to report the FR Y-14M due to their lack of 
mortgage and credit activities. The Board expects this situation to 
continue for the foreseeable future.
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    Estimated average hours per response: FR Y-14A: 929 hours; FR Y-
14Q: 2,201 hours; FR Y-14M: 1,072 hours.
    On-going Automation Revisions: 480 hours; FR Y-14 Attestation On-
going Attestation: 2,560 hours.
    Estimated annual burden hours: FR Y-14A: 33,444 hours; FR Y-14Q: 
316,944 hours; FR Y-14M: 437,376 hours; FR Y-14 On-going Automation 
Revisions: 17,280 hours; FR Y-14 Attestation On-going Attestation: 
33,280 hours.
    General description of report: This family of information 
collections is composed of the following three reports:
     The FR Y-14A collects quantitative projections of balance 
sheet, income, losses, and capital across a range of macroeconomic 
scenarios and qualitative information on methodologies used to develop 
internal projections of capital across scenarios.\53\
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    \53\ On October 10, 2019, the Board issued a final rule that 
eliminated the requirement for firms subject to Category IV 
standards to conduct and publicly disclose the results of a company-
run stress test. See 84 FR 59032 (Nov. 1, 2019). That final rule 
maintained the existing FR Y-14 substantive reporting requirements 
for these firms in order to provide the Board with the data it needs 
to conduct supervisory stress testing and inform the Board's ongoing 
monitoring and supervision of its supervised firms. However, as 
noted in the final rule, the Board intends to provide greater 
flexibility to banking organizations subject to Category IV 
standards in developing their annual capital plans and consider 
further change to the FR Y-14 forms as part of a separate proposal. 
See 84 FR 59032, 59063.
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     The quarterly FR Y-14Q collects granular data on various 
asset classes, including loans, securities, trading assets, and PPNR 
for the reporting period.
     The monthly FR Y-14M is comprised of three retail 
portfolio- and loan-level schedules, and one detailed address-matching 
schedule to supplement two of the portfolio and loan-level schedules.
    The data collected through the FR Y-14A/Q/M reports provide the 
Board with the information needed to help ensure that large firms have 
strong, firm-wide risk measurement and management processes supporting 
their internal assessments of capital adequacy and that their capital 
resources are sufficient given their business focus, activities, and 
resulting risk exposures. The reports are used to support the Board's 
annual Comprehensive Capital Analysis and Review (CCAR) and Dodd Frank 
Act Stress Test (DFAST) exercises, which complement other Board 
supervisory efforts aimed at enhancing the continued viability of large 
firms, including continuous monitoring of firms' planning and 
management of liquidity and funding resources, as well as regular 
assessments of credit, market and operational risks, and associated 
risk management practices. Information gathered in this data collection 
is also used in the supervision and regulation of respondent financial 
institutions. Respondent firms are currently required to complete and 
submit up to 17 filings each year: One annual FR Y-14A filing, four 
quarterly FR Y-14Q filings, and 12 monthly FR Y-14M filings. Compliance 
with the information collection is mandatory.
    Current actions: On March 19, 2020, the Board proposed to revise 
the FR Y-14 reports to collect TLAC and LTD information.\54\ The Board 
did not receive any comments on the proposed TLAC and LTD revisions. 
The Board has modified the Capital Assessments and Stress Testing (FR 
Y-14A and Q; OMB No. 7100-0341) in a manner consistent with the changes 
described above to the FR Y-9C. In addition, the Board has renumbered 
items in the FR Y-14A, Schedule A.1.d (Capital) instructions to 
correspond with related items on the FR Y-9C. The Board has adopted, as 
proposed, the following revisions to FR Y-14A, Schedule A.1.d, and FR 
Y-14Q, Schedule D, effective for the June 30, 2021, as of date:
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    \54\ See 85 FR 15776 (March 19, 2020).
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FR Y-14A, Schedule A.1.d (Capital)
    In order to align Schedule A.1.d with the FR Y-9C, the Board has 
added the following items to Schedule A.1.d:
     ``Outstanding eligible long-term debt'';
     ``Total loss-absorbing capacity'';
     ``LTD and TLAC total risk-weighted assets ratios'';
     ``IHCs of foreign GSIBs only: LTD and TLAC leverage 
ratios'';
     ``LTD and TLAC supplementary leverage ratios'';
     ``Institution-specific TLAC buffer necessary to avoid 
limitations on distributions discretionary bonus payments'';
     ``TLAC risk-weighted buffer''; and
     ``TLAC leverage buffer.''
FR Y-14Q, Schedule D (Regulatory Capital)
    The Board has revised the instructions for item 1 (``Aggregate 
amount of non-significant investments in the capital of unconsolidated 
financial institutions'') to require banking organizations subject to 
Category I and II standards to include covered debt instruments.

B. Regulatory Flexibility Act Analysis

    OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), 
requires an agency either to provide a final regulatory flexibility 
analysis with a final rule for which a general notice of proposed 
rulemaking is required or to certify that the final rule will not have 
a significant, economic impact on a substantial number of small 
entities. The Small Business Administration (SBA) establishes size 
standards that define which entities are small businesses for purposes 
of the RFA to

[[Page 723]]

include commercial banks and savings institutions with total assets of 
$600 million or less and trust companies with total assets of $41.5 
million of less) or to certify that the final rule would not have a 
significant economic impact on a substantial number of small entities.
    As of December 31, 2019, the OCC supervises 745 small entities.\55\
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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 $600 million and $41.5 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 Federal savings association as a small entity.
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    As part of the OCC's analysis, we consider whether the final rule 
will have a significant economic impact on a substantial number of 
small entities, pursuant to the RFA Because the final rule only applies 
to advanced approaches banking organizations it will not impact any 
OCC-supervised small entities. Therefore, the final rule will not have 
a significant economic impact on a substantial number of 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.
    Board: The Regulatory Flexibility Act (RFA) generally requires 
that, in connection with a final rulemaking, an agency prepare and make 
available for public comment a final regulatory flexibility analysis 
describing the impact of the proposed rule on small entities. However, 
a final regulatory flexibility analysis is not required if the agency 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities. The Small Business 
Administration (SBA) has defined ``small entities'' to include banking 
organizations with total assets of less than or equal to $600 million 
that are independently owned and operated or owned by a holding company 
with less than or equal to $600 million in total assets.\56\ For the 
reasons described below and under section 605(b) of the RFA, the Board 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.\57\ As of December 
31, 2019, there were 2,799 bank holding companies, 171 savings and loan 
holding companies, and 497 state member banks that would fit the SBA's 
current definition of ``small entity'' for purposes of the RFA.
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    \56\ See 13 CFR 121.201. Effective August 19, 2019, the SBA 
revised the size standards for banking organizations to $600 million 
in assets from $550 million in assets. 84 FR 34261 (July 18, 2019).
    \57\ 5 U.S.C. 605(b).
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    The Board has considered the potential impact of the final rule on 
small entities in accordance with the RFA. Based on its analysis and 
for the reasons stated below, the Board believes that this final rule 
will not have a significant economic impact on a substantial number of 
small entities.
    As discussed in detail above, the final rule amends the capital 
rule to require advanced approaches banking organizations to deduct 
exposures to covered debt instruments issued by covered BHCs, covered 
IHCs, and foreign GSIBs and their subsidiaries. These deductions are 
subject to regulatory thresholds, as described above. Deductions 
related to investments in and exposures to covered debt instruments are 
effectuated by deduction from tier 2 capital according to the 
corresponding deduction approach, subject to applicable deduction 
thresholds. However, the assets of institutions subject to this final 
rule substantially exceed the $600 million asset threshold under which 
a banking organization is considered a ``small entity'' under SBA 
regulations.\58\ Because the final rule is not likely to apply to any 
depository institution or company with assets of $600 million or less, 
it is not expected to apply to any small entity for purposes of the 
RFA. In light of the foregoing, the Board certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities supervised.
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    \58\ With respect to the revisions to the Board's total loss-
absorbing capacity rule, the scope of impacted institutions is 
different--Covered BHCs and Covered IHCs--but also only applies to 
institutions significantly above the threshold to be considered a 
``small entity.''
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    FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
generally requires an agency, in connection with a final rule, to 
prepare and make available for public comment a final regulatory 
flexibility analysis that describes the impact of a final rule on small 
entities.\59\ However, a regulatory flexibility analysis is not 
required if the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The Small Business Administration (SBA) has defined ``small entities'' 
to include banking organizations with total assets of less than or 
equal to $600 million who are independently owned and operated or owned 
by a holding company with less than $600 million in total assets.\60\ 
Generally, the FDIC considers a significant effect to be a quantified 
effect in excess of 5 percent of total annual salaries and benefits per 
institution, or 2.5 percent of total noninterest expenses. The FDIC 
believes that effects in excess of these thresholds typically represent 
significant effects for FDIC-supervised institutions. For the reasons 
described below and under section 605(b) of the RFA, the FDIC certifies 
that the final rule will not have a significant economic impact on a 
substantial number of small entities.
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    \59\ 5 U.S.C. 601 et seq.
    \60\ The SBA defines a small banking organization as having $600 
million or less in assets, where ``a financial institution's assets 
are determined by averaging the assets reported on its four 
quarterly financial statements for the preceding year.'' See 13 CFR 
121.201 (as amended, effective August 19, 2019). ``SBA counts the 
receipts, employees, or other measure of size of the concern whose 
size is at issue and all of its domestic and foreign affiliates.'' 
See 13 CFR 121.103. Following these regulations, the FDIC uses a 
covered entity's affiliated and acquired assets, averaged over the 
preceding four quarters, to determine whether the covered entity is 
``small'' for the purposes of RFA.
---------------------------------------------------------------------------

    The FDIC supervises 3,270 institutions,\61\ of which 2,492 are 
considered small entities for the purposes of RFA.\62\
---------------------------------------------------------------------------

    \61\ FDIC-supervised institutions are set forth in 12 U.S.C. 
1813(q)(2).
    \62\ Call Report data, June 30, 2020.
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    This final rule will affect all institutions subject to the 
Category I and Category II capital standards, and their subsidiaries. 
The FDIC supervises one institution that is a subsidiary of an 
institution that is subject to the Category I capital standards, and no 
FDIC-supervised institutions are subsidiaries of institutions that are 
subject to the Category II capital standards.\63\ The one FDIC-
supervised institution that would be subject to this final rule is not 
considered a small entity for the purposes of the RFA since it is owned 
by a holding company with over $600 million in total assets. Since this 
final rule does not affect any FDIC-supervised institutions that are 
defined as small entities for the purposes of the RFA, the FDIC 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.
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    \63\ Call Report data, June 30, 2020.
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C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \64\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies have sought to present 
the final rule in a simple and straightforward manner and did not 
receive any

[[Page 724]]

comments on the use of plain language in the proposed rule.
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    \64\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
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D. OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC analyzed the proposed rule under the factors set forth in 
the Unfunded Mandates Reform Act of 1995 (UMRA).\65\ Under this 
analysis, the OCC considered whether the final 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 for inflation). Because the 
rule does not specifically require banks to modify their policies and 
procedures, the OCC has determined that there are no expenditures for 
the purposes of UMRA. Therefore, the OCC concludes that this final rule 
will not result in expenditures of $100 million or more annually by 
State, local, and Tribal governments, or by the private sector.\66\
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    \65\ 2 U.S.C. 1532.
    \66\ Based on available supervisory information, the OCC 
determined that no OCC-supervised advanced approaches institutions 
currently hold TLAC instruments. Thus, there would no cost of 
capital associated with the implementation of this proposal. The OCC 
estimates that, if implemented, non-mandated, but anticipated 
compliance costs associated with activities such as modifying 
procedures and internal audit would be less than $1 million.
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E. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\67\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), each Federal banking agency 
must consider, consistent with principles of safety and soundness and 
the public interest, any administrative burdens that such regulations 
would place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
generally to take effect on the first day of a calendar quarter that 
begins on or after the date on which the regulations are published in 
final form.\68\
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    \67\ 12 U.S.C. 4802(a).
    \68\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    The Federal banking agencies considered the administrative burdens 
and benefits of the final rule and its elective framework in 
determining its effective date and administrative compliance 
requirements. As such, the final rule will be effective on April 1, 
2021.

F. Congressional Review Act

    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\69\ If a rule is deemed a ``major rule'' by the Office of 
Management and Budget (OMB), the Congressional Review Act generally 
provides that the rule may not take effect until at least 60 days 
following its publication.\70\
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 801 et seq.
    \70\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in (A) 
an annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\71\ As required by the Congressional Review Act, the 
agencies will submit the final rule and other appropriate reports to 
Congress and the Government Accountability Office for review.
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Risk.

12 CFR Part 217

    Administrative practice and procedure, Banks, Banking, Capital, 
Federal Reserve System, Holding companies.

12 CFR Part 252

    Administrative practice and procedure, Banks, banking, Credit, 
Federal Reserve System, Holding companies, Investments, Qualified 
financial contracts, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 324

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

Office of the Comptroller of the Currency

    For the reasons set out in the joint preamble, the OCC amends 12 
CFR part 3 as follows.

PART 3--CAPITAL ADEQUACY STANDARDS

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

    Authority:  12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, 5412(b)(2)(B), and 
Pub. L. 116-136, 134 Stat. 281.


0
2. In Sec.  3.2:
0
a. Add definitions in alphabetical order for ``Covered debt 
instrument'' and ``Excluded covered debt instrument'';
0
b. In the definition of ``Fiduciary or custodial and safekeeping 
accounts'', remove ``Sec.  3.10(c)(4)(ii)(J)'' and add ``Sec.  
3.10(c)(2)(x)'' in its place;
0
c. Revise the definition of ``Indirect exposure'';
0
d. Add a definition in alphabetical order for ``Investment in a covered 
debt instrument'';
0
e. Revise the definition of ``Synthetic exposure''; and
0
f. In the definition of ``Total leverage exposure'', remove ``Sec.  
3.10(c)(4)(ii)'' and add ``Sec.  3.10(c)(2)'' in its place.
    The additions and revisions read as follows:


Sec.  3.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC, as defined in 12 
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 
252.61, or that is pari passu or subordinated to any eligible debt 
security issued by the global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global 
systemically important banking organization that is not a global 
systemically important BHC, other than a Covered IHC, as defined in 12 
CFR 252.161; and where

[[Page 725]]

    (i) The instrument is eligible for use to comply with an applicable 
law or regulation requiring the issuance of a minimum amount of 
instruments to absorb losses or recapitalize the issuer or any of its 
subsidiaries in connection with a resolution, receivership, insolvency, 
or similar proceeding of the issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; for purposes of this 
paragraph (3)(ii) of this definition, if the issuer may be subject to a 
special resolution regime, in its jurisdiction of incorporation or 
organization, that addresses the failure or potential failure of a 
financial company and any instrument described in paragraph (3)(i) of 
this definition is eligible under that special resolution regime to be 
written down or converted into equity or any other capital instrument, 
then an instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition if that instrument is 
eligible under that special resolution regime to be written down or 
converted into equity or any other capital instrument ahead of or 
proportionally with any instrument described in paragraph (3)(i) of 
this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument does not include a debt instrument that qualifies as tier 2 
capital pursuant to 12 CFR 3.20(d) or that is otherwise treated as 
regulatory capital by the primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means an investment in a covered 
debt instrument held by a national bank or Federal savings association 
that is a subsidiary of a global systemically important BHC, as defined 
in 12 CFR 252.2, that:
    (1) Is held in connection with market making-related activities 
permitted under 12 CFR 44.4, provided that a direct exposure or an 
indirect exposure to a covered debt instrument is held for 30 business 
days or less; and
    (2) Has been designated as an excluded covered debt instrument by 
the national bank or Federal savings association that is a subsidiary 
of a global systemically important BHC, as defined in 12 CFR 252.2, 
pursuant to 12 CFR 3.22(c)(5)(iv)(A).
* * * * *
    Indirect exposure means an exposure that arises from the national 
bank's or Federal savings association's investment in an investment 
fund which holds an investment in the national bank's or Federal 
savings association's own capital instrument, or an investment in the 
capital of an unconsolidated financial institution. For an advanced 
approaches national bank or Federal savings association, indirect 
exposure also includes an investment in an investment fund that holds a 
covered debt instrument.
* * * * *
    Investment in a covered debt instrument means a national bank's or 
Federal savings association's net long position calculated in 
accordance with Sec.  3.22(h) in a covered debt instrument, including 
direct, indirect, and synthetic exposures to the debt instrument, 
excluding any underwriting positions held by the national bank or 
Federal savings association for five or fewer business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the national bank or Federal savings 
association's own capital instrument or to the value of an investment 
in the capital of an unconsolidated financial institution. For an 
advanced approaches national bank or Federal savings association, 
synthetic exposure includes an exposure whose value is linked to the 
value of an investment in a covered debt instrument.
* * * * *

0
3. Section 3.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
    The revision and addition read as follows:


Sec.  3.10   Minimum capital requirements.

* * * * *
    (c) Supplementary leverage ratio. (1) A Category III national bank 
or Federal savings association or advanced approaches national bank or 
Federal savings association must determine its supplementary leverage 
ratio in accordance with this paragraph, beginning with the calendar 
quarter immediately following the quarter in which the national bank or 
Federal savings association is identified as a Category III national 
bank or Federal savings association. An advanced approaches national 
bank's or Federal savings association's or a Category III national 
bank's or Federal savings association's supplementary leverage ratio is 
the ratio of its tier 1 capital to total leverage exposure, the latter 
of which is calculated as the sum of:
    (i) The mean of the on-balance sheet assets calculated as of each 
day of the reporting quarter; and
    (ii) The mean of the off-balance sheet exposures calculated as of 
the last day of each of the most recent three months, minus the 
applicable deductions under Sec.  3.22(a), (c), and (d).
    (2) For purposes of this part, total leverage exposure means the 
sum of the items described in paragraphs (c)(2)(i) through (viii) of 
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this 
section for a clearing member national bank and Federal savings 
association and paragraph (c)(2)(x) of this section for a custody bank:
    (i) The balance sheet carrying value of all of the national bank or 
Federal savings association's on-balance sheet assets, plus the value 
of securities sold under a repurchase transaction or a securities 
lending transaction that qualifies for sales treatment under GAAP, less 
amounts deducted from tier 1 capital under Sec.  3.22(a), (c), and (d), 
and less the value of securities received in security-for-security 
repo-style transactions, where the national bank or Federal savings 
association acts as a securities lender and includes the securities 
received in its on-balance sheet assets but has not sold or re-
hypothecated the securities received, and, for a national bank or 
Federal savings association that uses the standardized approach for 
counterparty credit risk under Sec.  3.132(c) for its standardized 
risk-weighted assets, less the fair value of any derivative contracts;
    (ii)(A) For a national bank or Federal savings association that 
uses the current exposure methodology under Sec.  3.34(b) for its 
standardized risk-weighted assets, the potential future credit exposure 
(PFE) for each derivative contract or each single-product netting set 
of derivative contracts (including a cleared transaction except as 
provided in paragraph (c)(2)(ix) of this section and, at the discretion 
of the national bank or Federal savings association, excluding a 
forward agreement treated as a derivative contract that is part of a 
repurchase or reverse repurchase or a securities borrowing or lending 
transaction that qualifies for sales treatment under GAAP), to which 
the national bank or Federal savings association is a counterparty as 
determined under Sec.  3.34, but without regard to Sec.  3.34(c), 
provided that:
    (1) A national bank or Federal savings association may choose to 
exclude the PFE of all credit derivatives or other similar instruments 
through which it provides credit protection when calculating the PFE 
under Sec.  3.34, but

[[Page 726]]

without regard to Sec.  3.34(c), provided that it does not adjust the 
net-to-gross ratio (NGR); and
    (2) A national bank or Federal savings association that chooses to 
exclude the PFE of credit derivatives or other similar instruments 
through which it provides credit protection pursuant to this paragraph 
(c)(2)(ii)(A) must do so consistently over time for the calculation of 
the PFE for all such instruments; or
    (B)(1) For a national bank or Federal savings association that uses 
the standardized approach for counterparty credit risk under section 
Sec.  3.132(c) for its standardized risk-weighted assets, the PFE for 
each netting set to which the national bank or Federal savings 
association is a counterparty (including cleared transactions except as 
provided in paragraph (c)(2)(ix) of this section and, at the discretion 
of the national bank or Federal savings association, excluding a 
forward agreement treated as a derivative contract that is part of a 
repurchase or reverse repurchase or a securities borrowing or lending 
transaction that qualifies for sales treatment under GAAP), as 
determined under Sec.  3.132(c)(7), in which the term C in Sec.  
3.132(c)(7)(i) equals zero, and, for any counterparty that is not a 
commercial end-user, multiplied by 1.4. For purposes of this paragraph 
(c)(2)(ii)(B)(1), a national bank or Federal savings association may 
set the value of the term C in Sec.  3.132(c)(7)(i) equal to the amount 
of collateral posted by a clearing member client of the national bank 
or Federal savings association in connection with the client-facing 
derivative transactions within the netting set; and
    (2) A national bank or Federal savings association may choose to 
exclude the PFE of all credit derivatives or other similar instruments 
through which it provides credit protection when calculating the PFE 
under Sec.  3.132(c), provided that it does so consistently over time 
for the calculation of the PFE for all such instruments;
    (iii)(A)(1) For a national bank or Federal savings association that 
uses the current exposure methodology under Sec.  3.34(b) for its 
standardized risk-weighted assets, the amount of cash collateral that 
is received from a counterparty to a derivative contract and that has 
offset the mark-to-fair value of the derivative asset, or cash 
collateral that is posted to a counterparty to a derivative contract 
and that has reduced the national bank or Federal savings association's 
on-balance sheet assets, unless such cash collateral is all or part of 
variation margin that satisfies the conditions in paragraphs 
(c)(2)(iii)(C) through (G) of this section; and
    (2) The variation margin is used to reduce the current credit 
exposure of the derivative contract, calculated as described in Sec.  
3.34(b), and not the PFE; and
    (3) For the purpose of the calculation of the NGR described in 
Sec.  3.34(b)(2)(ii)(B), variation margin described in paragraph 
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit 
exposure or the gross current credit exposure; or
    (B)(1) For a national bank or Federal savings association that uses 
the standardized approach for counterparty credit risk under Sec.  
3.132(c) for its standardized risk-weighted assets, the replacement 
cost of each derivative contract or single product netting set of 
derivative contracts to which the national bank or Federal savings 
association is a counterparty, calculated according to the following 
formula, and, for any counterparty that is not a commercial end-user, 
multiplied by 1.4:


Replacement Cost = max{V-CVMr + CVMp;0{time} 

Where:

    V equals the fair value for each derivative contract or each 
single-product netting set of derivative contracts (including a 
cleared transaction except as provided in paragraph (c)(2)(ix) of 
this section and, at the discretion of the national bank or Federal 
savings association, excluding a forward agreement treated as a 
derivative contract that is part of a repurchase or reverse 
repurchase or a securities borrowing or lending transaction that 
qualifies for sales treatment under GAAP);
    CVMr equals the amount of cash collateral received from a 
counterparty to a derivative contract and that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, 
or, in the case of a client-facing derivative transaction, the 
amount of collateral received from the clearing member client; and
    CVMp equals the amount of cash collateral that is posted to a 
counterparty to a derivative contract and that has not offset the 
fair value of the derivative contract and that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, 
or, in the case of a client-facing derivative transaction, the 
amount of collateral posted to the clearing member client;
    (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, 
where multiple netting sets are subject to a single variation margin 
agreement, a national bank or Federal savings association must apply 
the formula for replacement cost provided in Sec.  3.132(c)(10)(i), 
in which the term CMA may only include cash collateral 
that satisfies the conditions in paragraphs (c)(2)(iii)(C) through 
(G) of this section; and
    (3) For purposes of paragraph (c)(2)(iii)(B)(1), a national bank 
or Federal savings association must treat a derivative contract that 
references an index as if it were multiple derivative contracts each 
referencing one component of the index if the national bank or 
Federal savings association elected to treat the derivative contract 
as multiple derivative contracts under Sec.  3.132(c)(5)(vi);
    (C) For derivative contracts that are not cleared through a 
QCCP, the cash collateral received by the recipient counterparty is 
not segregated (by law, regulation, or an agreement with the 
counterparty);
    (D) Variation margin is calculated and transferred on a daily 
basis based on the mark-to-fair value of the derivative contract;
    (E) The variation margin transferred under the derivative 
contract or the governing rules of the CCP or QCCP for a cleared 
transaction is the full amount that is necessary to fully extinguish 
the net current credit exposure to the counterparty of the 
derivative contracts, subject to the threshold and minimum transfer 
amounts applicable to the counterparty under the terms of the 
derivative contract or the governing rules for a cleared 
transaction;
    (F) The variation margin is in the form of cash in the same 
currency as the currency of settlement set forth in the derivative 
contract, provided that for the purposes of this paragraph 
(c)(2)(iii)(F), currency of settlement means any currency for 
settlement specified in the governing qualifying master netting 
agreement and the credit support annex to the qualifying master 
netting agreement, or in the governing rules for a cleared 
transaction; and
    (G) The derivative contract and the variation margin are 
governed by a qualifying master netting agreement between the legal 
entities that are the counterparties to the derivative contract or 
by the governing rules for a cleared transaction, and the qualifying 
master netting agreement or the governing rules for a cleared 
transaction must explicitly stipulate that the counterparties agree 
to settle any payment obligations on a net basis, taking into 
account any variation margin received or provided under the contract 
if a credit event involving either counterparty occurs;
    (iv) The effective notional principal amount (that is, the 
apparent or stated notional principal amount multiplied by any 
multiplier in the derivative contract) of a credit derivative, or 
other similar instrument, through which the national bank or Federal 
savings association provides credit protection, provided that:
    (A) The national bank or Federal savings association may reduce 
the effective notional principal amount of the credit derivative by 
the amount of any reduction in the mark-to-fair value of the credit 
derivative if the reduction is recognized in common equity tier 1 
capital;
    (B) The national bank or Federal savings association may reduce 
the effective notional principal amount of the credit derivative by 
the effective notional principal amount of a purchased credit 
derivative or other similar instrument, provided that the remaining 
maturity of the purchased credit derivative is equal to or greater 
than the remaining maturity of the credit derivative through which 
the national bank or Federal savings

[[Page 727]]

association provides credit protection and that:
    (1) With respect to a credit derivative that references a single 
exposure, the reference exposure of the purchased credit derivative 
is to the same legal entity and ranks pari passu with, or is junior 
to, the reference exposure of the credit derivative through which 
the national bank or Federal savings association provides credit 
protection; or
    (2) With respect to a credit derivative that references multiple 
exposures, the reference exposures of the purchased credit 
derivative are to the same legal entities and rank pari passu with 
the reference exposures of the credit derivative through which the 
national bank or Federal savings association provides credit 
protection, and the level of seniority of the purchased credit 
derivative ranks pari passu to the level of seniority of the credit 
derivative through which the national bank or Federal savings 
association provides credit protection;
    (3) Where a national bank or Federal savings association has 
reduced the effective notional amount of a credit derivative through 
which the national bank or Federal savings association provides 
credit protection in accordance with paragraph (c)(2)(iv)(A) of this 
section, the national bank or Federal savings association must also 
reduce the effective notional principal amount of a purchased credit 
derivative used to offset the credit derivative through which the 
national bank or Federal savings association provides credit 
protection, by the amount of any increase in the mark-to-fair value 
of the purchased credit derivative that is recognized in common 
equity tier 1 capital; and
    (4) Where the national bank or Federal savings association 
purchases credit protection through a total return swap and records 
the net payments received on a credit derivative through which the 
national bank or Federal savings association provides credit 
protection in net income, but does not record offsetting 
deterioration in the mark-to-fair value of the credit derivative 
through which the national bank or Federal savings association 
provides credit protection in net income (either through reductions 
in fair value or by additions to reserves), the national bank or 
Federal savings association may not use the purchased credit 
protection to offset the effective notional principal amount of the 
related credit derivative through which the national bank or Federal 
savings association provides credit protection;
    (v) Where a national bank or Federal savings association acting 
as a principal has more than one repo-style transaction with the 
same counterparty and has offset the gross value of receivables due 
from a counterparty under reverse repurchase transactions by the 
gross value of payables under repurchase transactions due to the 
same counterparty, the gross value of receivables associated with 
the repo-style transactions less any on-balance sheet receivables 
amount associated with these repo-style transactions included under 
paragraph (c)(2)(i) of this section, unless the following criteria 
are met:
    (A) The offsetting transactions have the same explicit final 
settlement date under their governing agreements;
    (B) The right to offset the amount owed to the counterparty with 
the amount owed by the counterparty is legally enforceable in the 
normal course of business and in the event of receivership, 
insolvency, liquidation, or similar proceeding; and
    (C) Under the governing agreements, the counterparties intend to 
settle net, settle simultaneously, or settle according to a process 
that is the functional equivalent of net settlement, (that is, the 
cash flows of the transactions are equivalent, in effect, to a 
single net amount on the settlement date), where both transactions 
are settled through the same settlement system, the settlement 
arrangements are supported by cash or intraday credit facilities 
intended to ensure that settlement of both transactions will occur 
by the end of the business day, and the settlement of the underlying 
securities does not interfere with the net cash settlement;
    (vi) The counterparty credit risk of a repo-style transaction, 
including where the national bank or Federal savings association 
acts as an agent for a repo-style transaction and indemnifies the 
customer with respect to the performance of the customer's 
counterparty in an amount limited to the difference between the fair 
value of the security or cash its customer has lent and the fair 
value of the collateral the borrower has provided, calculated as 
follows:
    (A) If the transaction is not subject to a qualifying master 
netting agreement, the counterparty credit risk (E*) for 
transactions with a counterparty must be calculated on a transaction 
by transaction basis, such that each transaction i is treated as its 
own netting set, in accordance with the following formula, where 
Ei is the fair value of the instruments, gold, or cash 
that the national bank or Federal savings association has lent, sold 
subject to repurchase, or provided as collateral to the 
counterparty, and Ci is the fair value of the 
instruments, gold, or cash that the national bank or Federal savings 
association has borrowed, purchased subject to resale, or received 
as collateral from the counterparty:
Ei* = max {0, [Ei - Ci]{time} ; and

    (B) If the transaction is subject to a qualifying master netting 
agreement, the counterparty credit risk (E*) must be calculated as 
the greater of zero and the total fair value of the instruments, 
gold, or cash that the national bank or Federal savings association 
has lent, sold subject to repurchase or provided as collateral to a 
counterparty for all transactions included in the qualifying master 
netting agreement ([Sigma]Ei), less the total fair value 
of the instruments, gold, or cash that the national bank or Federal 
savings association borrowed, purchased subject to resale or 
received as collateral from the counterparty for those transactions 
([Sigma]Ci), in accordance with the following formula:

E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time} 

    (vii) If a national bank or Federal savings association acting 
as an agent for a repo-style transaction provides a guarantee to a 
customer of the security or cash its customer has lent or borrowed 
with respect to the performance of the customer's counterparty and 
the guarantee is not limited to the difference between the fair 
value of the security or cash its customer has lent and the fair 
value of the collateral the borrower has provided, the amount of the 
guarantee that is greater than the difference between the fair value 
of the security or cash its customer has lent and the value of the 
collateral the borrower has provided;
    (viii) The credit equivalent amount of all off-balance sheet 
exposures of the national bank or Federal savings association, 
excluding repo-style transactions, repurchase or reverse repurchase 
or securities borrowing or lending transactions that qualify for 
sales treatment under GAAP, and derivative transactions, determined 
using the applicable credit conversion factor under Sec.  3.33(b), 
provided, however, that the minimum credit conversion factor that 
may be assigned to an off-balance sheet exposure under this 
paragraph is 10 percent; and
    (ix) For a national bank or Federal savings association that is 
a clearing member:
    (A) A clearing member national bank or Federal savings 
association that guarantees the performance of a clearing member 
client with respect to a cleared transaction must treat its exposure 
to the clearing member client as a derivative contract for purposes 
of determining its total leverage exposure;
    (B) A clearing member national bank or Federal savings 
association that guarantees the performance of a CCP with respect to 
a transaction cleared on behalf of a clearing member client must 
treat its exposure to the CCP as a derivative contract for purposes 
of determining its total leverage exposure;
    (C) A clearing member national bank or Federal savings 
association that does not guarantee the performance of a CCP with 
respect to a transaction cleared on behalf of a clearing member 
client may exclude its exposure to the CCP for purposes of 
determining its total leverage exposure;
    (D) A national bank or Federal savings association that is a 
clearing member may exclude from its total leverage exposure the 
effective notional principal amount of credit protection sold 
through a credit derivative contract, or other similar instrument, 
that it clears on behalf of a clearing member client through a CCP 
as calculated in accordance with paragraph (c)(2)(iv) of this 
section; and
    (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this 
section, a national bank or Federal savings association may exclude 
from its total leverage exposure a clearing member's exposure to a 
clearing member client for a derivative contract, if the clearing 
member client and the clearing member are affiliates and 
consolidated for financial reporting purposes on the national bank's 
or Federal savings association's balance sheet.
    (x) A custodial bank shall exclude from its total leverage 
exposure the lesser of:
    (A) The amount of funds that the custody bank has on deposit at 
a qualifying central bank; and
    (B) The amount of funds that the custody bank's clients have on 
deposit at the custody bank that are linked to fiduciary or 
custodial and safekeeping accounts. For purposes of this paragraph 
(c)(2)(x), a deposit account is linked to a fiduciary or custodial 
and safekeeping account if the deposit account is provided to a 
client that maintains a

[[Page 728]]

fiduciary or custodial and safekeeping account with the custody 
bank, and the deposit account is used to facilitate the 
administration of the fiduciary or custody and safekeeping account.
    (d) Advanced approaches capital ratio calculations. An advanced 
approaches national bank or Federal savings association that has 
completed the parallel run process and received notification from 
the OCC pursuant to Sec.  3.121(d) must determine its regulatory 
capital ratios as described in paragraphs (d)(1) through (3) of this 
section.
    (1) Common equity tier 1 capital ratio. The national bank's or 
Federal savings association's common equity tier 1 capital ratio is 
the lower of:
    (i) The ratio of the national bank's or Federal savings 
association's common equity tier 1 capital to standardized total 
risk-weighted assets; and
    (ii) The ratio of the national bank's or Federal savings 
association's common equity tier 1 capital to advanced approaches 
total risk-weighted assets.
    (2) Tier 1 capital ratio. The national bank's or Federal savings 
association's tier 1 capital ratio is the lower of:
    (i) The ratio of the national bank's or Federal savings 
association's tier 1 capital to standardized total risk-weighted 
assets; and
    (ii) The ratio of the national bank's or Federal savings 
association's tier 1 capital to advanced approaches total risk-
weighted assets.
    (3) Total capital ratio. The national bank's or Federal savings 
association's total capital ratio is the lower of:
    (i) The ratio of the national bank's or Federal savings 
association's total capital to standardized total risk-weighted 
assets; and
    (ii) The ratio of the national bank's or Federal savings 
association's advanced-approaches-adjusted total capital to advanced 
approaches total risk-weighted assets. A national bank's or Federal 
savings association's advanced-approaches-adjusted total capital is 
the national bank's or Federal savings association's total capital 
after being adjusted as follows:
    (A) An advanced approaches national bank or Federal savings 
association must deduct from its total capital any allowance for 
loan and lease losses or adjusted allowance for credit losses, as 
applicable, included in its tier 2 capital in accordance with Sec.  
3.20(d)(3); and
    (B) An advanced approaches national bank or Federal savings 
association must add to its total capital any eligible credit 
reserves that exceed the national bank's or Federal savings 
association's total expected credit losses to the extent that the 
excess reserve amount does not exceed 0.6 percent of the national 
bank's or Federal savings association's credit risk-weighted assets.
    (4) Federal savings association tangible capital ratio. A 
Federal savings association's tangible capital ratio is the ratio of 
the Federal savings association's core capital (tier 1 capital) to 
average total assets as calculated under this subpart B. For 
purposes of this paragraph (d)(4), the term ``total assets'' means 
``total assets'' as defined in part 6, subpart A of this chapter, 
subject to subpart G of this part.
* * * * *

0
4. In Sec.  3.22, revise paragraphs (c), (f), and (h) to read as 
follows:


Sec.  3.22  Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the national bank's or Federal savings association's own capital 
instruments. A national bank or Federal savings association must deduct 
an investment in the national bank's or Federal savings association's 
own capital instruments, as follows:
---------------------------------------------------------------------------

    \23\ The national bank or Federal savings association must 
calculate amounts deducted under paragraphs (c) through (f) of this 
section after it calculates the amount of ALLL or AACL, as 
applicable, includable in tier 2 capital under Sec.  3.20(d)(3).
---------------------------------------------------------------------------

    (i) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
common stock instruments from its common equity tier 1 capital elements 
to the extent such instruments are not excluded from regulatory capital 
under Sec.  3.20(b)(1);
    (ii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
additional tier 1 capital instruments from its additional tier 1 
capital elements; and
    (iii) A national bank or Federal savings association must deduct an 
investment in the national bank's or Federal savings association's own 
tier 2 capital instruments from its tier 2 capital elements.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), 
investments in the capital of unconsolidated financial institutions for 
a national bank or Federal savings association that is not an advanced 
approaches national bank or Federal savings association (as described 
in paragraph (c)(4) of this section), non-significant investments in 
the capital of unconsolidated financial institutions for an advanced 
approaches national bank or Federal savings association (as described 
in paragraph (c)(5) of this section), and non-common stock significant 
investments in the capital of unconsolidated financial institutions for 
an advanced approaches national bank or Federal savings association (as 
described in paragraph (c)(6) of this section). Under the corresponding 
deduction approach, a national bank or Federal savings association must 
make deductions from the component of capital for which the underlying 
instrument would qualify if it were issued by the national bank or 
Federal savings association itself, as described in paragraphs 
(c)(2)(i) through (iii) of this section. If the national bank or 
Federal savings association does not have a sufficient amount of a 
specific component of capital to effect the required deduction, the 
shortfall must be deducted according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the national bank or Federal savings association must treat the 
instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  3.20, the national bank or Federal savings 
association must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches national bank or Federal savings 
association, a tier 2 capital instrument if it is a covered debt 
instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  3.300(c)), the national bank or Federal 
savings association must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or

[[Page 729]]

    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.
    (3) Reciprocal cross holdings in the capital of financial 
institutions. (i) A national bank or Federal savings association must 
deduct an investment in the capital of other financial institutions 
that it holds reciprocally with another financial institution, where 
such reciprocal cross holdings result from a formal or informal 
arrangement to swap, exchange, or otherwise intend to hold each other's 
capital instruments, by applying the corresponding deduction approach 
in paragraph (c)(2) of this section.
    (ii) An advanced approaches national bank or Federal savings 
association must deduct an investment in any covered debt instrument 
that the institution holds reciprocally with another financial 
institution, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital or covered debt instruments, by applying the 
corresponding deduction approach in paragraph (c)(2) of this section.
    (4) Investments in the capital of unconsolidated financial 
institutions. A national bank or Federal savings association that is 
not an advanced approaches national bank or Federal savings association 
must deduct its investments in the capital of unconsolidated financial 
institutions (as defined in Sec.  3.2) that exceed 25 percent of the 
sum of the national bank or Federal savings association's common equity 
tier 1 capital elements minus all deductions from and adjustments to 
common equity tier 1 capital elements required under paragraphs (a) 
through (c)(3) of this section by applying the corresponding deduction 
approach in paragraph (c)(2) of this section.\24\ The deductions 
described in this section are net of associated DTLs in accordance with 
paragraph (e) of this section. In addition, with the prior written 
approval of the OCC, a national bank or Federal savings association 
that underwrites a failed underwriting, for the period of time 
stipulated by the OCC, is not required to deduct an investment in the 
capital of an unconsolidated financial institution pursuant to this 
paragraph (c) to the extent the investment is related to the failed 
underwriting.\25\
---------------------------------------------------------------------------

    \24\ With the prior written approval of the OCC, for the period 
of time stipulated by the OCC, a national bank or Federal savings 
association is not required to deduct a non-significant investment 
in the capital instrument of an unconsolidated financial institution 
or an investment in a covered debt instrument pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the OCC.
    \25\ Any non-significant investments in the capital of an 
unconsolidated financial institution that is not required to be 
deducted under this paragraph (c)(4) or otherwise under this section 
must be assigned the appropriate risk weight under subparts D, E, or 
F of this part, as applicable.
---------------------------------------------------------------------------

    (5) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) An advanced approaches national bank or 
Federal savings association must deduct its non-significant investments 
in the capital of unconsolidated financial institutions (as defined in 
Sec.  3.2) that, in the aggregate and together with any investment in a 
covered debt instrument (as defined in Sec.  3.2) issued by a financial 
institution in which the national bank or Federal savings association 
does not have a significant investment in the capital of the 
unconsolidated financial institution (as defined in Sec.  3.2), exceeds 
10 percent of the sum of the advanced approaches national bank's or 
Federal savings association's common equity tier 1 capital elements 
minus all deductions from and adjustments to common equity tier 1 
capital elements required under paragraphs (a) through (c)(3) of this 
section (the 10 percent threshold for non-significant investments) by 
applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\26\ The deductions described in this paragraph are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the OCC, an advanced 
approaches national bank or Federal savings association that 
underwrites a failed underwriting, for the period of time stipulated by 
the OCC, is not required to deduct from capital a non-significant 
investment in the capital of an unconsolidated financial institution or 
an investment in a covered debt instrument pursuant to this paragraph 
(c)(5) to the extent the investment is related to the failed 
underwriting.\27\ For any calculation under this paragraph (c)(5)(i), 
an advanced approaches national bank or Federal savings association may 
exclude the amount of an investment in a covered debt instrument under 
paragraph (c)(5)(iii) or (iv) of this section, as applicable.
---------------------------------------------------------------------------

    \26\ With the prior written approval of the OCC, for the period 
of time stipulated by the OCC, an advanced approaches a national 
bank or Federal savings association is not required to deduct a non-
significant investment in the capital instrument of an 
unconsolidated financial institution or an investment in a covered 
debt instrument pursuant to this paragraph if the financial 
institution is in distress and if such investment is made for the 
purpose of providing financial support to the financial institution, 
as determined by the OCC.
    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(4) or otherwise under this section must be assigned 
the appropriate risk weight under subpart D, E, or F of this part, 
as applicable.
---------------------------------------------------------------------------

    (ii) For an advanced approaches national bank or Federal savings 
association, the amount to be deducted under this paragraph (c)(5) from 
a specific capital component is equal to:
    (A) The advanced approaches national bank's or Federal savings 
association's aggregate non-significant investments in the capital of 
an unconsolidated financial institution and, if applicable, any 
investments in a covered debt instrument subject to deduction under 
this paragraph (c)(5), exceeding the 10 percent threshold for non-
significant investments, multiplied by
    (B) The ratio of the advanced approaches national bank's or Federal 
savings association's aggregate non-significant investments in the 
capital of an unconsolidated financial institution (in the form of such 
capital component) to the national bank's or Federal savings 
association's total non-significant investments in unconsolidated 
financial institutions, with an investment in a covered debt instrument 
being treated as tier 2 capital for this purpose.
    (iii) For purposes of applying the deduction under paragraph 
(c)(5)(i) of this section, an advanced approaches national bank or 
Federal savings association that is not a subsidiary of a global 
systemically important banking organization, as defined in 12 CFR 
252.2, may exclude from the deduction the amount of the national bank's 
or Federal savings association's gross long position, in accordance 
with Sec.  3.22(h)(2), in investments in covered debt instruments 
issued by financial institutions in which the national bank or Federal 
savings association does not have a significant investment in the 
capital of the unconsolidated financial institutions up to an amount 
equal to 5 percent of the sum of the national bank's or Federal savings 
association's common equity tier 1 capital elements minus all 
deductions from and adjustments to common equity tier 1 capital 
elements required under paragraphs (a) through (c)(3) of this section, 
net of associated DTLs in accordance with paragraph (e) of this 
section.
    (iv) Prior to applying the deduction under paragraph (c)(5)(i) of 
this section:
    (A) A national bank or Federal savings association that is a 
subsidiary of a global systemically important BHC, as defined in 12 CFR 
252.2, may designate

[[Page 730]]

any investment in a covered debt instrument as an excluded covered debt 
instrument, as defined in Sec.  3.2.
    (B) A national bank or Federal savings association that is a 
subsidiary of a global systemically important BHC, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach in 
paragraph (c)(2) of this section, its gross long position, calculated 
in accordance with paragraph (h)(2) of this section, in a covered debt 
instrument that was originally designated as an excluded covered debt 
instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, 
but no longer qualifies as an excluded covered debt instrument.
    (C) A national bank or Federal savings association that is a 
subsidiary of a global systemically important BHC, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach in 
paragraph (c)(2) of this section the amount of its gross long position, 
calculated in accordance with paragraph (h)(2) of this section, in a 
direct or indirect investment in a covered debt instrument that was 
originally designated as an excluded covered debt instrument, in 
accordance with paragraph (c)(5)(iv)(A) of this section, and has been 
held for more than thirty business days.
    (D) A national bank or Federal savings association that is a 
subsidiary of a global systemically important BHC, as defined in 12 CFR 
252.2, must deduct according to the corresponding deduction approach in 
paragraph (c)(2) of this section its gross long position, calculated in 
accordance with paragraph (h)(2) of this section, of its aggregate 
investment in excluded covered debt instruments that exceeds 5 percent 
of the sum of the national bank's or Federal savings association's 
common equity tier 1 capital elements minus all deductions from and 
adjustments to common equity tier 1 capital elements required under 
paragraphs (a) through (c)(3) of this section, net of associated DTLs 
in accordance with paragraph (e) of this section.
    (6) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. If an 
advanced approaches national bank or Federal savings association has a 
significant investment in the capital of an unconsolidated financial 
institution, the advanced approaches national bank or Federal savings 
association must deduct from capital any such investment issued by the 
unconsolidated financial institution that is held by the national bank 
or Federal savings association other than an investment in the form of 
common stock, as well as any investment in a covered debt instrument 
issued by the unconsolidated financial institution, by applying the 
corresponding deduction approach in paragraph (c)(2) of this 
section.\28\ The deductions described in this section are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the OCC, for the period of 
time stipulated by the OCC, an advanced approaches national bank or 
Federal savings association that underwrites a failed underwriting is 
not required to deduct the significant investment in the capital of an 
unconsolidated financial institution or an investment in a covered debt 
instrument pursuant to this paragraph (c)(6) if such investment is 
related to such failed underwriting.
---------------------------------------------------------------------------

    \28\ With prior written approval of the OCC, for the period of 
time stipulated by the OCC, an advanced approaches national bank or 
Federal savings association is not required to deduct an investment 
in a covered debt instrument under this paragraph (c)(5) or 
otherwise under this section if such investment is made for the 
purpose of providing financial support to the financial institution 
as determined by the OCC.
---------------------------------------------------------------------------

* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
national bank or Federal savings association does not have a sufficient 
amount of a specific component of capital to effect the full amount of 
any deduction from capital required under paragraph (d) of this 
section, the national bank or Federal savings association must deduct 
the shortfall amount from the next higher (that is, more subordinated) 
component of regulatory capital. Any investment by an advanced 
approaches national bank or Federal savings association in a covered 
debt instrument must be treated as an investment in the tier 2 capital 
for purposes of this paragraph. Notwithstanding any other provision of 
this section, a qualifying community banking organization (as defined 
in Sec.  3.12) that has elected to use the community bank leverage 
ratio framework pursuant to Sec.  3.12 is not required to deduct any 
shortfall of tier 2 capital from its additional tier 1 capital or 
common equity tier 1 capital.
* * * * *
    (h) Net long position--(1) In general. For purposes of calculating 
the amount of a national bank's or Federal savings association's 
investment in the national bank's or Federal savings association's own 
capital instrument, investment in the capital of an unconsolidated 
financial institution, and investment in a covered debt instrument 
under this section, the institution's net long position is the gross 
long position in the underlying instrument determined in accordance 
with paragraph (h)(2) of this section, as adjusted to recognize any 
short position by the national bank or Federal savings association in 
the same instrument subject to paragraph (h)(3) of this section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the national 
bank or Federal savings association, the adjusted carrying value of the 
exposure as that term is defined in Sec.  3.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  3.2;
    (iii) For each indirect exposure, the national bank's or Federal 
savings association's carrying value of its investment in an investment 
fund or, alternatively:
    (A) A national bank or Federal savings association may, with the 
prior approval of the OCC, use a conservative estimate of the amount of 
its indirect investment in the national bank's or Federal savings 
association's own capital instruments, its indirect investment in the 
capital of an unconsolidated financial institution, or its indirect 
investment in a covered debt instrument held through a position in an 
index, as applicable; or
    (B) A national bank or Federal savings association may calculate 
the gross long position for an indirect exposure to the national bank's 
or Federal savings association's own capital the capital in an 
unconsolidated financial institution, or a covered debt instrument by 
multiplying the national bank's or Federal savings association's 
carrying value of its investment in the investment fund by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the national bank's or Federal savings association's own 
capital instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings (in percent) of the 
investment in the national bank's or Federal savings association's own 
capital instruments, investment in the capital of an unconsolidated 
financial institution, or investment in a covered debt instrument, as 
applicable; and

[[Page 731]]

    (iv) For a synthetic exposure, the amount of the national bank's or 
Federal savings association's loss on the exposure if the reference 
capital instrument or covered debt instrument were to have a value of 
zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the national bank's 
or Federal savings association's Call Report, if the national bank or 
Federal savings association has a contractual right or obligation to 
sell the long position at a specific point in time and the counterparty 
to the contract has an obligation to purchase the long position if the 
national bank or Federal savings association exercises its right to 
sell, this point in time may be treated as the maturity of the long 
position such that the maturity of the long position and short position 
are deemed to match for purposes of the maturity requirement, even if 
the maturity of the short position is less than one year; and
    (iii) For an investment in a national bank's or Federal savings 
association's own capital instrument under paragraph (c)(1) of this 
section, an investment in the capital of an unconsolidated financial 
institution under paragraphs (c)(4) through (6) and (d) of this section 
(as applicable), and an investment in a covered debt instrument under 
paragraphs (c)(1), (5), and (6) of this section:
    (A) The national bank or Federal savings association may only net a 
short position against a long position in an investment in the national 
bank's or Federal savings association's own capital instrument under 
paragraph (c)(1) of this section if the short position involves no 
counterparty credit risk;
    (B) A gross long position in an investment in the national bank's 
or Federal savings association's own capital instrument, an investment 
in the capital of an unconsolidated financial institution, or an 
investment in a covered debt instrument due to a position in an index 
may be netted against a short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the national bank's or Federal 
savings association's own capital instrument, an investment in the 
capital instrument of an unconsolidated financial institution, or an 
investment in a covered debt instrument can be decomposed to provide 
recognition of the hedge. More specifically, the portion of the index 
that is composed of the same underlying instrument that is being hedged 
may be used to offset the long position if both the long position being 
hedged and the short position in the index are reported as a trading 
asset or trading liability (whether on- or off-balance sheet) on the 
national bank's or Federal savings association's Call Report, and the 
hedge is deemed effective by the national bank's or Federal savings 
association's internal control processes, which have not been found to 
be inadequate by the OCC.


Sec.  3.121  [Amended]

0
5. Section 3.121 is amended by removing ``Sec.  3.10(c)(1) through 
(3)'' and adding ``Sec.  3.10(d)(1) through (3)'' in its place in 
paragraph (c).


Sec.  3.132  [Amended]

0
6. Section 3.132 is amended by removing ``Sec.  3.10(c)(4)(ii)(B)'' and 
adding ``Sec.  3.10(c)(2)(ii)(B)'' in paragraphs (c)(7)(iii) and (iv).


Sec.  3.304  [Amended]

0
7. Section 3.304 is amended by:
0
a. Removing ``Sec.  3.10(c)(4)'' and adding in its place ``Sec.  
3.10(d)'' in paragraph (a) introductory text; and
0
b. Removing ``Sec.  3.10(c)(4)(ii)(J)(1)'' and adding in its place 
``Sec.  3.10(c)(2)(x)(A)'' in paragraph (e).

Board of Governors of the Federal Reserve System

    For the reasons set forth in the joint preamble, the Board amends 
part 217 of chapter II of title 12 of the Code of Federal Regulations 
as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q).

0
8. The authority citation for part 217 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371, and 5371 note; Pub. L. 116-136, 
134 Stat. 281.


0
9. In Sec.  217.2:
0
a. Add definitions in alphabetical order for ``Covered debt 
instrument'' and ``Excluded covered debt instrument'';
0
b. In the definition of ``Fiduciary or custodial and safekeeping 
accounts'', remove ``Sec.  217.10(c)(4)(ii)(J)'' and add ``Sec.  
217.10(c)(2)(x)'' in its place;
0
c. Revise the definition of ``Indirect exposure'';
0
d. Add a definition in alphabetical order for ``Investment in a covered 
debt instrument'';
0
e. Revise the definition of ``Synthetic exposure''; and
0
f. In the definition of ``Total leverage exposure'', remove ``Sec.  
217.10(c)(4)(ii)'' and add ``Sec.  217.10(c)(2)'' in its place.
    The additions and revisions read as follows:


Sec.  217.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC and that is an 
eligible debt security, as defined in 12 CFR 252.61, or that is pari 
passu or subordinated to any eligible debt security issued by the 
global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC; or issued by a subsidiary of a global systemically important 
banking organization that is not a global systemically important BHC, 
other than a Covered IHC, as defined in 12 CFR 252.161; and where,
    (i) The instrument is eligible for use to comply with an applicable 
law or regulation requiring the issuance of a minimum amount of 
instruments to absorb losses or recapitalize the issuer or any of its 
subsidiaries in connection with a resolution, receivership, insolvency, 
or similar proceeding of the issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; for purposes of this 
paragraph (3)(ii) of this definition, if the issuer may be subject to a 
special resolution regime, in its jurisdiction of incorporation or 
organization, that addresses the failure or potential failure of a 
financial company and any

[[Page 732]]

instrument described in paragraph (3)(i) of this definition is eligible 
under that special resolution regime to be written down or converted 
into equity or any other capital instrument, then an instrument is pari 
passu or subordinated to any instrument described in paragraph (3)(i) 
of this definition if that instrument is eligible under that special 
resolution regime to be written down or converted into equity or any 
other capital instrument ahead of or proportionally with any instrument 
described in paragraph (3)(i) of this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument does not include a debt instrument that qualifies as tier 2 
capital pursuant to 12 CFR 217.20(d) or that is otherwise treated as 
regulatory capital by the primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means an investment in a covered 
debt instrument held by a global systemically important BHC or a Board-
regulated institution that is a subsidiary of a global systemically 
important BHC that:
    (1) Is held in connection with market making-related activities 
permitted under 12 CFR 248.4, provided that a direct exposure or an 
indirect exposure to a covered debt instrument is held for 30 business 
days or less; and
    (2) Has been designated as an excluded covered debt instrument by 
the global systemically important BHC or the subsidiary of a global 
systemically important BHC pursuant to 12 CFR 217.22(c)(5)(iv)(A).
* * * * *
    Indirect exposure means an exposure that arises from the Board-
regulated institution's investment in an investment fund which holds an 
investment in the Board-regulated institution's own capital instrument 
or an investment in the capital of an unconsolidated financial 
institution. For an advanced approaches Board-regulated institution, 
indirect exposure also includes an investment in an investment fund 
that holds a covered debt instrument.
* * * * *
    Investment in a covered debt instrument means a Board-regulated 
institution's net long position calculated in accordance with Sec.  
217.22(h) in a covered debt instrument, including direct, indirect, and 
synthetic exposures to the debt instrument, excluding any underwriting 
positions held by the Board-regulated institution for five or fewer 
business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the Board-regulated institution's own capital 
instrument or to the value of an investment in the capital of an 
unconsolidated financial institution. For an advanced approaches Board-
regulated institution, synthetic exposure includes an exposure whose 
value is linked to the value of an investment in a covered debt 
instrument.
* * * * *

0
10. Section 217.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
    The revision and addition read as follows:


Sec.  217.10   Minimum capital requirements.

* * * * *
    (c) Supplementary leverage ratio. (1) A Category III Board-
regulated institution or advanced approaches Board-regulated 
institution must determine its supplementary leverage ratio in 
accordance with this paragraph, beginning with the calendar quarter 
immediately following the quarter in which the Board-regulated 
institution is identified as a Category III Board-regulated 
institution. An advanced approaches Board-regulated institution's or a 
Category III Board-regulated institution's supplementary leverage ratio 
is the ratio of its tier 1 capital to total leverage exposure, the 
latter of which is calculated as the sum of:
    (i) The mean of the on-balance sheet assets calculated as of each 
day of the reporting quarter; and
    (ii) The mean of the off-balance sheet exposures calculated as of 
the last day of each of the most recent three months, minus the 
applicable deductions under Sec.  217.22(a), (c), and (d).
    (2) For purposes of this part, total leverage exposure means the 
sum of the items described in paragraphs (c)(2)(i) through (viii) of 
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this 
section for a clearing member Board-regulated institution and paragraph 
(c)(2)(x) of this section for a custodial banking organization:
    (i) The balance sheet carrying value of all of the Board-regulated 
institution's on-balance sheet assets, plus the value of securities 
sold under a repurchase transaction or a securities lending transaction 
that qualifies for sales treatment under GAAP, less amounts deducted 
from tier 1 capital under Sec.  217.22(a), (c), and (d), and less the 
value of securities received in security-for-security repo-style 
transactions, where the Board-regulated institution acts as a 
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities 
received, and, for a Board-regulated institution that uses the 
standardized approach for counterparty credit risk under Sec.  
217.132(c) for its standardized risk-weighted assets, less the fair 
value of any derivative contracts;
    (ii)(A) For a Board-regulated institution that uses the current 
exposure methodology under Sec.  217.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each 
derivative contract or each single-product netting set of derivative 
contracts (including a cleared transaction except as provided in 
paragraph (c)(2)(ix) of this section and, at the discretion of the 
Board-regulated institution, excluding a forward agreement treated as a 
derivative contract that is part of a repurchase or reverse repurchase 
or a securities borrowing or lending transaction that qualifies for 
sales treatment under GAAP), to which the Board-regulated institution 
is a counterparty as determined under Sec.  217.34, but without regard 
to Sec.  217.34(c), provided that:
    (1) A Board-regulated institution may choose to exclude the PFE of 
all credit derivatives or other similar instruments through which it 
provides credit protection when calculating the PFE under Sec.  217.34, 
but without regard to Sec.  217.34(c), provided that it does not adjust 
the net-to-gross ratio (NGR); and
    (2) A Board-regulated institution that chooses to exclude the PFE 
of credit derivatives or other similar instruments through which it 
provides credit protection pursuant to paragraph (c)(2)(ii)(A) of this 
section must do so consistently over time for the calculation of the 
PFE for all such instruments; or
    (B)(1) For a Board-regulated institution that uses the standardized 
approach for counterparty credit risk under section Sec.  217.132(c) 
for its standardized risk-weighted assets, the PFE for each netting set 
to which the Board-regulated institution is a counterparty (including 
cleared transactions except as provided in paragraph (c)(2)(ix) of this 
section and, at the discretion of the Board-regulated institution, 
excluding a forward agreement treated as a derivative contract that is 
part of a repurchase or reverse repurchase or a securities borrowing or 
lending transaction that qualifies for sales treatment under GAAP), as 
determined under Sec.  217.132(c)(7), in which the term C in

[[Page 733]]

Sec.  217.132(c)(7)(i) equals zero, and, for any counterparty that is 
not a commercial end-user, multiplied by 1.4. For purposes of this 
paragraph (c)(2)(ii)(B)(1), a Board-regulated institution may set the 
value of the term C in Sec.  217.132(c)(7)(i) equal to the amount of 
collateral posted by a clearing member client of the Board-regulated 
institution in connection with the client-facing derivative 
transactions within the netting set; and
    (2) A Board-regulated institution may choose to exclude the PFE of 
all credit derivatives or other similar instruments through which it 
provides credit protection when calculating the PFE under Sec.  
217.132(c), provided that it does so consistently over time for the 
calculation of the PFE for all such instruments;
    (iii)(A)(1) For a Board-regulated institution that uses the current 
exposure methodology under Sec.  217.34(b) for its standardized risk-
weighted assets, the amount of cash collateral that is received from a 
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted 
to a counterparty to a derivative contract and that has reduced the 
Board-regulated institution's on-balance sheet assets, unless such cash 
collateral is all or part of variation margin that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; 
and
    (2) The variation margin is used to reduce the current credit 
exposure of the derivative contract, calculated as described in Sec.  
217.34(b), and not the PFE; and
    (3) For the purpose of the calculation of the NGR described in 
Sec.  217.34(b)(2)(ii)(B), variation margin described in paragraph 
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit 
exposure or the gross current credit exposure; or
    (B)(1) For a Board-regulated institution that uses the standardized 
approach for counterparty credit risk under Sec.  217.132(c) for its 
standardized risk-weighted assets, the replacement cost of each 
derivative contract or single product netting set of derivative 
contracts to which the Board-regulated institution is a counterparty, 
calculated according to the following formula, and, for any 
counterparty that is not a commercial end-user, multiplied by 1.4:

Replacement Cost = max{V-CVMr + CVMp;0{time} 

Where:

    V equals the fair value for each derivative contract or each 
single-product netting set of derivative contracts (including a 
cleared transaction except as provided in paragraph (c)(2)(ix) of 
this section and, at the discretion of the Board-regulated 
institution, excluding a forward agreement treated as a derivative 
contract that is part of a repurchase or reverse repurchase or a 
securities borrowing or lending transaction that qualifies for sales 
treatment under GAAP);
    CVMr equals the amount of cash collateral received from a 
counterparty to a derivative contract and that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, 
or, in the case of a client-facing derivative transaction, the 
amount of collateral received from the clearing member client; and
    CVMp equals the amount of cash collateral that is posted to a 
counterparty to a derivative contract and that has not offset the 
fair value of the derivative contract and that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, 
or, in the case of a client-facing derivative transaction, the 
amount of collateral posted to the clearing member client;
    (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, 
where multiple netting sets are subject to a single variation margin 
agreement, a Board-regulated institution must apply the formula for 
replacement cost provided in Sec.  217.132(c)(10)(i), in which the 
term CMA may only include cash collateral that satisfies 
the conditions in paragraphs (c)(2)(iii)(C) through (G) of this 
section; and
    (3) For purposes of paragraph (c)(2)(iii)(B)(1), a Board-
regulated institution must treat a derivative contract that 
references an index as if it were multiple derivative contracts each 
referencing one component of the index if the Board-regulated 
institution elected to treat the derivative contract as multiple 
derivative contracts under Sec.  217.132(c)(5)(vi);
    (C) For derivative contracts that are not cleared through a 
QCCP, the cash collateral received by the recipient counterparty is 
not segregated (by law, regulation, or an agreement with the 
counterparty);
    (D) Variation margin is calculated and transferred on a daily 
basis based on the mark-to-fair value of the derivative contract;
    (E) The variation margin transferred under the derivative 
contract or the governing rules of the CCP or QCCP for a cleared 
transaction is the full amount that is necessary to fully extinguish 
the net current credit exposure to the counterparty of the 
derivative contracts, subject to the threshold and minimum transfer 
amounts applicable to the counterparty under the terms of the 
derivative contract or the governing rules for a cleared 
transaction;
    (F) The variation margin is in the form of cash in the same 
currency as the currency of settlement set forth in the derivative 
contract, provided that for the purposes of this paragraph 
(c)(2)(iii)(F), currency of settlement means any currency for 
settlement specified in the governing qualifying master netting 
agreement and the credit support annex to the qualifying master 
netting agreement, or in the governing rules for a cleared 
transaction; and
    (G) The derivative contract and the variation margin are 
governed by a qualifying master netting agreement between the legal 
entities that are the counterparties to the derivative contract or 
by the governing rules for a cleared transaction, and the qualifying 
master netting agreement or the governing rules for a cleared 
transaction must explicitly stipulate that the counterparties agree 
to settle any payment obligations on a net basis, taking into 
account any variation margin received or provided under the contract 
if a credit event involving either counterparty occurs;
    (iv) The effective notional principal amount (that is, the 
apparent or stated notional principal amount multiplied by any 
multiplier in the derivative contract) of a credit derivative, or 
other similar instrument, through which the Board-regulated 
institution provides credit protection, provided that:
    (A) The Board-regulated institution may reduce the effective 
notional principal amount of the credit derivative by the amount of 
any reduction in the mark-to-fair value of the credit derivative if 
the reduction is recognized in common equity tier 1 capital;
    (B) The Board-regulated institution may reduce the effective 
notional principal amount of the credit derivative by the effective 
notional principal amount of a purchased credit derivative or other 
similar instrument, provided that the remaining maturity of the 
purchased credit derivative is equal to or greater than the 
remaining maturity of the credit derivative through which the Board-
regulated institution provides credit protection and that:
    (1) With respect to a credit derivative that references a single 
exposure, the reference exposure of the purchased credit derivative 
is to the same legal entity and ranks pari passu with, or is junior 
to, the reference exposure of the credit derivative through which 
the Board-regulated institution provides credit protection; or
    (2) With respect to a credit derivative that references multiple 
exposures, the reference exposures of the purchased credit 
derivative are to the same legal entities and rank pari passu with 
the reference exposures of the credit derivative through which the 
Board-regulated institution provides credit protection, and the 
level of seniority of the purchased credit derivative ranks pari 
passu to the level of seniority of the credit derivative through 
which the Board-regulated institution provides credit protection;
    (3) Where a Board-regulated institution has reduced the 
effective notional amount of a credit derivative through which the 
Board-regulated institution provides credit protection in accordance 
with paragraph (c)(2)(iv)(A) of this section, the Board-regulated 
institution must also reduce the effective notional principal amount 
of a purchased credit derivative used to offset the credit 
derivative through which the Board-regulated institution provides 
credit protection, by the amount of any increase in the mark-to-fair 
value of the purchased credit derivative that is recognized in 
common equity tier 1 capital; and
    (4) Where the Board-regulated institution purchases credit 
protection through a total return swap and records the net payments

[[Page 734]]

received on a credit derivative through which the Board-regulated 
institution provides credit protection in net income, but does not 
record offsetting deterioration in the mark-to-fair value of the 
credit derivative through which the Board-regulated institution 
provides credit protection in net income (either through reductions 
in fair value or by additions to reserves), the Board-regulated 
institution may not use the purchased credit protection to offset 
the effective notional principal amount of the related credit 
derivative through which the Board-regulated institution provides 
credit protection;
    (v) Where a Board-regulated institution acting as a principal 
has more than one repo-style transaction with the same counterparty 
and has offset the gross value of receivables due from a 
counterparty under reverse repurchase transactions by the gross 
value of payables under repurchase transactions due to the same 
counterparty, the gross value of receivables associated with the 
repo-style transactions less any on-balance sheet receivables amount 
associated with these repo-style transactions included under 
paragraph (c)(2)(i) of this section, unless the following criteria 
are met:
    (A) The offsetting transactions have the same explicit final 
settlement date under their governing agreements;
    (B) The right to offset the amount owed to the counterparty with 
the amount owed by the counterparty is legally enforceable in the 
normal course of business and in the event of receivership, 
insolvency, liquidation, or similar proceeding; and
    (C) Under the governing agreements, the counterparties intend to 
settle net, settle simultaneously, or settle according to a process 
that is the functional equivalent of net settlement, (that is, the 
cash flows of the transactions are equivalent, in effect, to a 
single net amount on the settlement date), where both transactions 
are settled through the same settlement system, the settlement 
arrangements are supported by cash or intraday credit facilities 
intended to ensure that settlement of both transactions will occur 
by the end of the business day, and the settlement of the underlying 
securities does not interfere with the net cash settlement;
    (vi) The counterparty credit risk of a repo-style transaction, 
including where the Board-regulated institution acts as an agent for 
a repo-style transaction and indemnifies the customer with respect 
to the performance of the customer's counterparty in an amount 
limited to the difference between the fair value of the security or 
cash its customer has lent and the fair value of the collateral the 
borrower has provided, calculated as follows:
    (A) If the transaction is not subject to a qualifying master 
netting agreement, the counterparty credit risk (E*) for 
transactions with a counterparty must be calculated on a transaction 
by transaction basis, such that each transaction i is treated as its 
own netting set, in accordance with the following formula, where 
Ei is the fair value of the instruments, gold, or cash 
that the Board-regulated institution has lent, sold subject to 
repurchase, or provided as collateral to the counterparty, and 
Ci is the fair value of the instruments, gold, or cash 
that the Board-regulated institution has borrowed, purchased subject 
to resale, or received as collateral from the counterparty:

Ei* = max {0, [Ei - Ci]{time} ; and

    (B) If the transaction is subject to a qualifying master netting 
agreement, the counterparty credit risk (E*) must be calculated as 
the greater of zero and the total fair value of the instruments, 
gold, or cash that the Board-regulated institution has lent, sold 
subject to repurchase or provided as collateral to a counterparty 
for all transactions included in the qualifying master netting 
agreement ([Sigma]Ei), less the total fair value of the 
instruments, gold, or cash that the Board-regulated institution 
borrowed, purchased subject to resale or received as collateral from 
the counterparty for those transactions ([Sigma]Ci), in 
accordance with the following formula:

E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time} 

    (vii) If a Board-regulated institution acting as an agent for a 
repo-style transaction provides a guarantee to a customer of the 
security or cash its customer has lent or borrowed with respect to 
the performance of the customer's counterparty and the guarantee is 
not limited to the difference between the fair value of the security 
or cash its customer has lent and the fair value of the collateral 
the borrower has provided, the amount of the guarantee that is 
greater than the difference between the fair value of the security 
or cash its customer has lent and the value of the collateral the 
borrower has provided;
    (viii) The credit equivalent amount of all off-balance sheet 
exposures of the Board-regulated institution, excluding repo-style 
transactions, repurchase or reverse repurchase or securities 
borrowing or lending transactions that qualify for sales treatment 
under GAAP, and derivative transactions, determined using the 
applicable credit conversion factor under Sec.  217.33(b), provided, 
however, that the minimum credit conversion factor that may be 
assigned to an off-balance sheet exposure under this paragraph is 10 
percent; and
    (ix) For a Board-regulated institution that is a clearing 
member:
    (A) A clearing member Board-regulated institution that 
guarantees the performance of a clearing member client with respect 
to a cleared transaction must treat its exposure to the clearing 
member client as a derivative contract for purposes of determining 
its total leverage exposure;
    (B) A clearing member Board-regulated institution that 
guarantees the performance of a CCP with respect to a transaction 
cleared on behalf of a clearing member client must treat its 
exposure to the CCP as a derivative contract for purposes of 
determining its total leverage exposure;
    (C) A clearing member Board-regulated institution that does not 
guarantee the performance of a CCP with respect to a transaction 
cleared on behalf of a clearing member client may exclude its 
exposure to the CCP for purposes of determining its total leverage 
exposure;
    (D) A Board-regulated institution that is a clearing member may 
exclude from its total leverage exposure the effective notional 
principal amount of credit protection sold through a credit 
derivative contract, or other similar instrument, that it clears on 
behalf of a clearing member client through a CCP as calculated in 
accordance with paragraph (c)(2)(iv) of this section; and
    (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this 
section, a Board-regulated institution may exclude from its total 
leverage exposure a clearing member's exposure to a clearing member 
client for a derivative contract, if the clearing member client and 
the clearing member are affiliates and consolidated for financial 
reporting purposes on the Board-regulated institution's balance 
sheet.
    (x) A custodial banking organization shall exclude from its 
total leverage exposure the lesser of:
    (A) The amount of funds that the custodial banking organization 
has on deposit at a qualifying central bank; and
    (B) The amount of funds in deposit accounts at the custodial 
banking organization that are linked to fiduciary or custodial and 
safekeeping accounts at the custodial banking organization. For 
purposes of this paragraph (c)(2)(x), a deposit account is linked to 
a fiduciary or custodial and safekeeping account if the deposit 
account is provided to a client that maintains a fiduciary or 
custodial and safekeeping account with the custodial banking 
organization, and the deposit account is used to facilitate the 
administration of the fiduciary or custodial and safekeeping 
account.
    (d) Advanced approaches capital ratio calculations. An advanced 
approaches Board-regulated institution that has completed the 
parallel run process and received notification from the Board 
pursuant to Sec.  217.121(d) must determine its regulatory capital 
ratios as described in paragraphs (d)(1) through (3) of this 
section.
    (1) Common equity tier 1 capital ratio. The Board-regulated 
institution's common equity tier 1 capital ratio is the lower of:
    (i) The ratio of the Board-regulated institution's common equity 
tier 1 capital to standardized total risk-weighted assets; and
    (ii) The ratio of the Board-regulated institution's common 
equity tier 1 capital to advanced approaches total risk-weighted 
assets.
    (2) Tier 1 capital ratio. The Board-regulated institution's tier 
1 capital ratio is the lower of:
    (i) The ratio of the Board-regulated institution's tier 1 
capital to standardized total risk-weighted assets; and
    (ii) The ratio of the Board-regulated institution's tier 1 
capital to advanced approaches total risk-weighted assets.
    (3) Total capital ratio. The Board-regulated institution's total 
capital ratio is the lower of:
    (i) The ratio of the Board-regulated institution's total capital 
to standardized total risk-weighted assets; and
    (ii) The ratio of the Board-regulated institution's advanced-
approaches-adjusted total capital to advanced approaches total risk-
weighted assets. A Board-regulated institution's advanced-
approaches-adjusted total capital is the Board-regulated 
institution's total capital after being adjusted as follows:

[[Page 735]]

    (A) An advanced approaches Board-regulated institution must 
deduct from its total capital any allowance for loan and lease 
losses or adjusted allowance for credit losses, as applicable, 
included in its tier 2 capital in accordance with Sec.  
217.20(d)(3); and
    (B) An advanced approaches Board-regulated institution must add 
to its total capital any eligible credit reserves that exceed the 
Board-regulated institution's total expected credit losses to the 
extent that the excess reserve amount does not exceed 0.6 percent of 
the Board-regulated institution's credit risk-weighted assets.
* * * * *

0
11. In Sec.  217.22, revise paragraphs (c), (f) and (h) to read as 
follows:


Sec.  217.22   Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the Board-regulated institution's own capital or covered debt 
instruments. A Board-regulated institution must deduct an investment in 
the Board-regulated institution's own capital instruments, and an 
advanced approaches Board-regulated institution also must deduct an 
investment in the Board-regulated institution's own covered debt 
instruments, as follows:

    \23\ The Board-regulated institution must calculate amounts 
deducted under paragraphs (c) through (f) of this section after it 
calculates the amount of ALLL or AACL, as applicable, includable in 
tier 2 capital under Sec.  217.20(d)(3).

    (i) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own common stock instruments from its 
common equity tier 1 capital elements to the extent such instruments 
are not excluded from regulatory capital under Sec.  217.20(b)(1);
    (ii) A Board-regulated institution must deduct an investment in the 
Board-regulated institution's own additional tier 1 capital instruments 
from its additional tier 1 capital elements;
    (iii) A Board-regulated institution must deduct an investment in 
the Board-regulated institution's own tier 2 capital instruments from 
its tier 2 capital elements; and
    (iv) An advanced approaches Board-regulated institution must deduct 
an investment in the institution's own covered debt instruments from 
its tier 2 capital elements, as applicable. If the advanced approaches 
Board-regulated institution does not have a sufficient amount of tier 2 
capital to effect this deduction, the institution must deduct the 
shortfall amount from the next higher (that is, more subordinated) 
component of regulatory capital.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), 
investments in the capital of unconsolidated financial institutions for 
a Board-regulated institution that is not an advanced approaches Board-
regulated institution (as described in paragraph (c)(4) of this 
section), non-significant investments in the capital of unconsolidated 
financial institutions for an advanced approaches Board-regulated 
institution (as described in paragraph (c)(5) of this section), and 
non-common stock significant investments in the capital of 
unconsolidated financial institutions for an advanced approaches Board-
regulated institution (as described in paragraph (c)(6) of this 
section). Under the corresponding deduction approach, a Board-regulated 
institution must make deductions from the component of capital for 
which the underlying instrument would qualify if it were issued by the 
Board-regulated institution itself, as described in paragraphs 
(c)(2)(i) through (iii) of this section. If the Board-regulated 
institution does not have a sufficient amount of a specific component 
of capital to effect the required deduction, the shortfall must be 
deducted according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the Board-regulated institution must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  217.20, the Board-regulated institution must 
treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches Board-regulated institution, a tier 
2 capital instrument if it is a covered debt instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  217.300(c)), the Board-regulated 
institution must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.
    (3) Reciprocal cross holdings in the capital of financial 
institutions. (i) A Board-regulated institution must deduct an 
investment in the capital of other financial institutions that it holds 
reciprocally, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital instruments, by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.
    (ii) An advanced approaches Board-regulated institution must deduct 
an investment in any covered debt instrument that the institution holds 
reciprocally with another financial institution, where such reciprocal 
cross holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital or covered 
debt instruments, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.
    (4) Investments in the capital of unconsolidated financial 
institutions. A Board-regulated institution that is not an advanced 
approaches Board-regulated institution must deduct its investments in 
the capital of unconsolidated financial institutions (as defined in 
Sec.  217.2) that exceed 25 percent of the sum of the Board-regulated 
institution's common equity tier 1 capital elements minus all 
deductions from and adjustments to

[[Page 736]]

common equity tier 1 capital elements required under paragraphs (a) 
through (c)(3) of this section by applying the corresponding deduction 
approach in paragraph (c)(2) of this section.\24\ The deductions 
described in this section are net of associated DTLs in accordance with 
paragraph (e) of this section. In addition, with the prior written 
approval of the Board, a Board-regulated institution that underwrites a 
failed underwriting, for the period of time stipulated by the Board, is 
not required to deduct an investment in the capital of an 
unconsolidated financial institution pursuant to this paragraph (c) to 
the extent the investment is related to the failed underwriting.\25\

    \24\ With the prior written approval of the Board, for the 
period of time stipulated by the Board, a Board-regulated 
institution that is not an advanced approaches Board-regulated 
institution is not required to deduct an investment in the capital 
of an unconsolidated financial institution pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the Board.

    \25\ Any investments in the capital of unconsolidated financial 
institutions that do not exceed the 25 percent threshold for 
investments in the capital of unconsolidated financial institutions 
under this section must be assigned the appropriate risk weight 
under subparts D or F of this part, as applicable.

    (5) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) An advanced approaches Board-regulated 
institution must deduct its non-significant investments in the capital 
of unconsolidated financial institutions (as defined in Sec.  217.2) 
that, in the aggregate and together with any investment in a covered 
debt instrument (as defined in Sec.  217.2) issued by a financial 
institution in which the Board-regulated institution does not have a 
significant investment in the capital of the unconsolidated financial 
institution (as defined in Sec.  217.2), exceeds 10 percent of the sum 
of the advanced approaches Board-regulated institution's common equity 
tier 1 capital elements minus all deductions from and adjustments to 
common equity tier 1 capital elements required under paragraphs (a) 
through (c)(3) of this section (the 10 percent threshold for non-
significant investments) by applying the corresponding deduction 
approach in paragraph (c)(2) of this section.\26\ The deductions 
described in this paragraph are net of associated DTLs in accordance 
with paragraph (e) of this section. In addition, with the prior written 
approval of the Board, an advanced approaches Board-regulated 
institution that underwrites a failed underwriting, for the period of 
time stipulated by the Board, is not required to deduct from capital a 
non-significant investment in the capital of an unconsolidated 
financial institution or an investment in a covered debt instrument 
pursuant to this paragraph (c)(5) to the extent the investment is 
related to the failed underwriting.\27\ For any calculation under this 
paragraph (c)(5)(i), an advanced approaches Board-regulated institution 
may exclude the amount of an investment in a covered debt instrument 
under paragraph (c)(5)(iii) or (iv) of this section, as applicable.

    \26\ With the prior written approval of the Board, for the 
period of time stipulated by the Board, an advanced approaches 
Board-regulated institution is not required to deduct a non-
significant investment in the capital of an unconsolidated financial 
institution or an investment in a covered debt instrument pursuant 
to this paragraph if the financial institution is in distress and if 
such investment is made for the purpose of providing financial 
support to the financial institution, as determined by the Board.

    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(5) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.

    (ii) For an advanced approaches Board-regulated institution, the 
amount to be deducted under this paragraph (c)(5) from a specific 
capital component is equal to:
    (A) The advanced approaches Board-regulated institution's aggregate 
non-significant investments in the capital of an unconsolidated 
financial institution and, if applicable, any investments in a covered 
debt instrument subject to deduction under this paragraph (c)(5), 
exceeding the 10 percent threshold for non-significant investments, 
multiplied by
    (B) The ratio of the advanced approaches Board-regulated 
institution's aggregate non-significant investments in the capital of 
an unconsolidated financial institution (in the form of such capital 
component) to the advanced approaches Board-regulated institution's 
total non-significant investments in unconsolidated financial 
institutions, with an investment in a covered debt instrument being 
treated as tier 2 capital for this purpose.
    (iii) For purposes of applying the deduction under paragraph 
(c)(5)(i) of this section, an advanced approaches Board-regulated 
institution that is not a global systemically important BHC or a 
subsidiary of a global systemically important banking organization, as 
defined in 12 CFR 252.2, may exclude from the deduction the amount of 
the Board-regulated institution's gross long position, in accordance 
with Sec.  217.22(h)(2), in investments in covered debt instruments 
issued by financial institutions in which the Board-regulated 
institution does not have a significant investment in the capital of 
the unconsolidated financial institutions up to an amount equal to 5 
percent of the sum of the Board-regulated institution's common equity 
tier 1 capital elements minus all deductions from and adjustments to 
common equity tier 1 capital elements required under paragraphs (a) 
through (c)(3) of this section, net of associated DTLs in accordance 
with paragraph (e) of this section.
    (iv) Prior to applying the deduction under paragraph (c)(5)(i) of 
this section:
    (A) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important BHC 
may designate any investment in a covered debt instrument as an 
excluded covered debt instrument, as defined in Sec.  217.2.
    (B) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important BHC 
must deduct, according to the corresponding deduction approach in 
paragraph (c)(2) of this section, its gross long position, calculated 
in accordance with paragraph (h)(2) of this section, in a covered debt 
instrument that was originally designated as an excluded covered debt 
instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, 
but no longer qualifies as an excluded covered debt instrument.
    (C) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important BHC 
must deduct according to the corresponding deduction approach in 
paragraph (c)(2) of this section the amount of its gross long position, 
calculated in accordance with paragraph (h)(2) of this section, in a 
direct or indirect investment in a covered debt instrument that was 
originally designated as an excluded covered debt instrument, in 
accordance with paragraph (c)(5)(iv)(A) of this section, and has been 
held for more than thirty business days.
    (D) A global systemically important BHC or a Board-regulated 
institution that is a subsidiary of a global systemically important BHC 
must deduct according to the corresponding deduction approach in 
paragraph (c)(2) of this section its gross long position, calculated in 
accordance with paragraph (h)(2) of this section, of its aggregate

[[Page 737]]

position in excluded covered debt instruments that exceeds 5 percent of 
the sum of the Board-regulated institution's common equity tier 1 
capital elements minus all deductions from and adjustments to common 
equity tier 1 capital elements required under paragraphs (a) through 
(c)(3) of this section, net of associated DTLs in accordance with 
paragraph (e) of this section.
    (6) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. If an 
advanced approaches Board-regulated institution has a significant 
investment in the capital of an unconsolidated financial institution, 
the advanced approaches Board-regulated institution must deduct from 
capital any such investment issued by the unconsolidated financial 
institution that is held by the Board-regulated institution other than 
an investment in the form of common stock, as well as any investment in 
a covered debt instrument issued by the unconsolidated financial 
institution, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.\28\ The deductions described in this 
section are net of associated DTLs in accordance with paragraph (e) of 
this section. In addition, with the prior written approval of the 
Board, for the period of time stipulated by the Board, an advanced 
approaches Board-regulated institution that underwrites a failed 
underwriting is not required to deduct the significant investment in 
the capital of an unconsolidated financial institution or an investment 
in a covered debt instrument pursuant to this paragraph (c)(6) if such 
investment is related to such failed underwriting.

    \28\ With prior written approval of the Board, for the period of 
time stipulated by the Board, an advanced approaches Board-regulated 
institution is not required to deduct a significant investment in 
the capital of an unconsolidated financial institution, including an 
investment in a covered debt instrument, under this paragraph (c)(6) 
or otherwise under this section if such investment is made for the 
purpose of providing financial support to the financial institution 
as determined by the Board.
* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if a 
Board-regulated institution does not have a sufficient amount of a 
specific component of capital to effect the full amount of any 
deduction from capital required under paragraph (d) of this section, 
the Board-regulated institution must deduct the shortfall amount from 
the next higher (that is, more subordinated) component of regulatory 
capital. Any investment by an advanced approaches Board-regulated 
institution in a covered debt instrument must be treated as an 
investment in the tier 2 capital for purposes of this paragraph (f). 
Notwithstanding any other provision of this section, a qualifying 
community banking organization (as defined in Sec.  217.12) that has 
elected to use the community bank leverage ratio framework pursuant to 
Sec.  217.12 is not required to deduct any shortfall of tier 2 capital 
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
    (h) Net long position--(1) In general. For purposes of calculating 
the amount of a Board-regulated institution's investment in the Board 
regulated institution's own capital instrument, investment in the 
capital of an unconsolidated financial institution, and investment in a 
covered debt instrument under this section, the institution's net long 
position is the gross long position in the underlying instrument 
determined in accordance with paragraph (h)(2) of this section, as 
adjusted to recognize any short position by the Board-regulated 
institution in the same instrument subject to paragraph (h)(3) of this 
section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the Board-
regulated institution, the adjusted carrying value of the exposure as 
that term is defined in Sec.  217.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  217.2;
    (iii) For each indirect exposure, the Board-regulated institution's 
carrying value of its investment in an investment fund or, 
alternatively:
    (A) A Board-regulated institution may, with the prior approval of 
the Board, use a conservative estimate of the amount of its indirect 
investment in the Board-regulated institution's own capital 
instruments, its indirect investment in the capital of an 
unconsolidated financial institution, or its indirect investment in a 
covered debt instrument held through a position in an index, as 
applicable; or
    (B) A Board-regulated institution may calculate the gross long 
position for an indirect exposure to the Board-regulated institution's 
own capital instruments, the capital of an unconsolidated financial 
institution, or a covered debt instrument by multiplying the Board-
regulated institution's carrying value of its investment in the 
investment fund by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the Board-regulated institution's own capital 
instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings (in percent) of the 
investment in the Board-regulated institution's own capital 
instruments, investment in the capital of an unconsolidated financial 
institution, or investment in a covered debt instrument, as applicable; 
and
    (iv) For a synthetic exposure, the amount of the Board-regulated 
institution's loss on the exposure if the reference capital or covered 
debt instrument were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the Board-regulated 
institution's Call Report, for a state member bank, or FR Y-9C, for a 
bank holding company, savings and loan holding company, or intermediate 
holding company, as applicable, if the Board-regulated institution has 
a contractual right or obligation to sell the long position at a 
specific point in time and the counterparty to the contract has an 
obligation to purchase the long position if the Board-regulated 
institution exercises its right to sell, this point in time may be 
treated as the maturity of the long position such that the maturity of 
the long position and short position are deemed to match for purposes 
of the maturity requirement, even if the maturity of the short position 
is less than one year; and
    (iii) For an investment in a Board-regulated institution's own 
capital instrument under paragraph (c)(1) of this section, an 
investment in the capital of an unconsolidated financial institution 
under paragraphs (c)(4) through (6) and (d) of this section (as 
applicable), and an investment in a covered debt instrument under

[[Page 738]]

paragraphs (c)(1), (5), and (6) of this section:
    (A) The Board-regulated institution may only net a short position 
against a long position in an investment in the Board-regulated 
institution's own capital instrument or own covered debt instrument 
under paragraph (c)(1) of this section if the short position involves 
no counterparty credit risk;
    (B) A gross long position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital of 
an unconsolidated financial institution, or an investment in a covered 
debt instrument due to a position in an index may be netted against a 
short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the Board-regulated 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument can be decomposed to provide recognition 
of the hedge. More specifically, the portion of the index that is 
composed of the same underlying instrument that is being hedged may be 
used to offset the long position if both the long position being hedged 
and the short position in the index are reported as a trading asset or 
trading liability (whether on- or off-balance sheet) on the Board-
regulated institution's Call Report, for a state member bank, or FR Y-
9C, for a bank holding company, savings and loan holding company, or 
intermediate holding company, as applicable, and the hedge is deemed 
effective by the Board-regulated institution's internal control 
processes, which have not been found to be inadequate by the Board.


Sec.  217.121  [Amended]

0
12. Section 217.121 is amended by removing ``Sec.  217.10(c)(1) through 
(3)'' and adding ``Sec.  217.10(d)(1) through (3)'' in paragraph (c).


Sec.  217.132  [Amended]

0
13. Section 217.132 is amended by removing ``Sec.  
217.10(c)(4)(ii)(B)(2)'' and adding ``Sec.  217.10(c)(2)(ii)(B)'' in 
paragraphs (c)(7)(iii) and (iv).


Sec.  217.303  [Amended]

0
14. Section 217.303 is amended by:
0
a. Removing ``Sec.  217.10(c)(4)'' and adding in its place ``Sec.  
217.10(c)'' in paragraph (a); and
0
b. Removing ``Sec.  217.10(c)(4)(ii)(J)(1)'' and adding in its place 
``Sec.  217.10(c)(2)(x)(A)'' in paragraph (e).

PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)

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

    Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 
1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., 
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367, 
5368, 5371.

Subpart G--External Long-Term Debt Requirement, External Total 
Loss-Absorbing Capacity Requirement and Buffer, and Restrictions on 
Corporate Practices for U.S. Global Systemically Important Banking 
Organizations

0
16. In Sec.  252.61, remove the definition of ``External TLAC buffer'' 
and add a definition for ``External TLAC risk-weighted buffer'' in 
alphabetical order.
    The addition reads as follows:


Sec.  252.61   Definitions.

* * * * *
    External TLAC risk-weighted buffer means, with respect to a global 
systemically important BHC, the sum of 2.5 percent, any applicable 
countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a 
percentage), and the global systemically important BHC's method 1 
capital surcharge.
* * * * *

0
17. In Sec.  252.63, revise paragraphs (c)(3)(i)(C) and 
(c)(5)(iii)(A)(2) to read as follows:


Sec.  252.63   External total loss-absorbing capacity requirement and 
buffer.

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (C) The ratio (expressed as a percentage) of the global 
systemically important BHC's outstanding eligible external long-term 
debt amount plus 50 percent of the amount of unpaid principal of 
outstanding eligible debt securities issued by the global systemically 
important BHC due to be paid in, as calculated in Sec.  252.62(b)(2), 
greater than or equal to 365 days (one year) but less than 730 days 
(two years) to total risk-weighted assets.
* * * * *
    (5) * * *
    (iii) * * *
    (A) * * *
    (2) The ratio (expressed as a percentage) of the global 
systemically important BHC's outstanding eligible external long-term 
debt amount plus 50 percent of the amount of unpaid principal of 
outstanding eligible debt securities issued by the global systemically 
important BHC due to be paid in in, as calculated in Sec.  
252.62(b)(2), greater than or equal to 365 days (one year) but less 
than 730 days (two years) to total leverage exposure.
* * * * *

Subpart P--Covered IHC Long-Term Debt Requirement, Covered IHC 
Total Loss-Absorbing Capacity Requirement and Buffer, and 
Restrictions on Corporate Practices for Intermediate Holding 
Companies of Global Systemically Important Foreign Banking 
Organizations

0
18. In Sec.  252.160, revise paragraph (b)(2) to read as follows:


Sec.  252.160   Applicability.

* * * * *
    (b) * * *
    (2) 1095 days (three years) after the later of the date on which:
    (i) The U.S. non-branch assets of the global systemically important 
foreign banking organization that controls the Covered IHC equaled or 
exceeded $50 billion; and
    (ii) The foreign banking organization that controls the Covered IHC 
became a global systemically important foreign banking organization.
* * * * *

0
19. In Sec.  252.162, revise paragraph (b)(1) to read as follows:


Sec.  252.162  Covered IHC long-term debt requirement.

* * * * *
    (b) * * *
    (1) A Covered IHC's outstanding eligible Covered IHC long-term debt 
amount is the sum of:
    (i) One hundred (100) percent of the amount due to be paid of 
unpaid principal of the outstanding eligible Covered IHC debt 
securities issued by the Covered IHC in greater than or equal to 730 
days (two years); and
    (ii) Fifty (50) percent of the amount due to be paid of unpaid 
principal of the outstanding eligible Covered IHC debt securities 
issued by the Covered IHC in greater than or equal to 365 days (one 
year) and less than 730 days (two years); and
    (iii) Zero (0) percent of the amount due to be paid of unpaid 
principal of the outstanding eligible Covered IHC debt securities 
issued by the Covered IHC in less than 365 days (one year).
* * * * *

[[Page 739]]


0
20. In Sec.  252.165, revise paragraph (d)(3)(i)(C) to read as follows:


Sec.  252.165  Covered IHC total loss-absorbing capacity requirement 
and buffer.

* * * * *
    (d) * * *
    (3) * * *
    (i) * * *
    (C) The ratio (expressed as a percentage) of the Covered IHC's 
outstanding eligible Covered IHC long-term debt amount plus 50 percent 
of the amount of unpaid principal of outstanding eligible Covered IHC 
debt securities issued by the Covered IHC due to be paid in, as 
calculated in Sec.  252.162(b)(2), greater than or equal to 365 days 
(one year) but less than 730 days (two years) to total risk-weighted 
assets.
* * * * *

12 CFR Part 324

FEDERAL DEPOSIT INSURANCE CORPORATION

    For the reasons set out in the joint preamble, the FDIC amends 12 
CFR part 324 as follows.

PART 324--CAPITAL ADEQUACY OF FDIC-SUPERVISED INSTITUTIONS

0
21. The authority citation for part 324 continues to read as follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 1835, 3907, 3909, 4808; 5371; 5412; Pub. L. 102-233, 
105 Stat. 1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 
105 Stat. 2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 
2233 (12 U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, 
as amended by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 
note); Pub. L. 111-203, 124 Stat. 1376, 1887 (15 U.S.C. 78o-7 note), 
Pub. L. 115-174; section 4014, Pub. L. 116-136, 134 Stat. 281 (15 
U.S.C. 9052).


0
22. In Sec.  324.2:
0
a. Add in alphabetical order definitions for ``Covered debt 
instrument'' and ``Excluded covered debt instrument'';
0
b. Revise the definitions of ``Fiduciary or custodial and safekeeping 
account'' and ``Indirect exposure'';
0
c. Add in alphabetical order and definition for ``Investment in a 
covered debt instrument''; and
0
d. Revise the definitions of ``Synthetic exposure'' and ``Total 
leverage exposure''.
    The additions and revisions read as follows:


Sec.  324.2   Definitions.

* * * * *
    Covered debt instrument means an unsecured debt instrument that is:
    (1) Issued by a global systemically important BHC, as defined in 12 
CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 
252.61, or that is pari passu or subordinated to any eligible debt 
security issued by the global systemically important BHC; or
    (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that 
is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, 
or that is pari passu or subordinated to any eligible Covered IHC debt 
security issued by the Covered IHC; or
    (3) Issued by a global systemically important banking organization, 
as defined in 12 CFR 252.2 other than a global systemically important 
BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global 
systemically important banking organization that is not a global 
systemically important BHC, other than a Covered IHC, as defined in 12 
CFR 252.161; and where,
    (i) The instrument is eligible for use to comply with an applicable 
law or regulation requiring the issuance of a minimum amount of 
instruments to absorb losses or recapitalize the issuer or any of its 
subsidiaries in connection with a resolution, receivership, insolvency, 
or similar proceeding of the issuer or any of its subsidiaries; or
    (ii) The instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition; for purposes of this 
paragraph (3)(ii) of this definition, if the issuer may be subject to a 
special resolution regime, in its jurisdiction of incorporation or 
organization, that addresses the failure or potential failure of a 
financial company and any instrument described in paragraph (3)(i) of 
this definition is eligible under that special resolution regime to be 
written down or converted into equity or any other capital instrument, 
then an instrument is pari passu or subordinated to any instrument 
described in paragraph (3)(i) of this definition if that instrument is 
eligible under that special resolution regime to be written down or 
converted into equity or any other capital instrument ahead of or 
proportionally with any instrument described in paragraph (3)(i) of 
this definition; and
    (4) Provided that, for purposes of this definition, covered debt 
instrument does not include a debt instrument that qualifies as tier 2 
capital pursuant to 12 CFR 324.20(d) or that is otherwise treated as 
regulatory capital by the primary supervisor of the issuer.
* * * * *
    Excluded covered debt instrument means an investment in a covered 
debt instrument held by an FDIC-supervised institution that is a 
subsidiary of a global systemically important BHC, as defined in 12 CFR 
252.2, that:
    (1) Is held in connection with market making-related activities 
permitted under 12 CFR 351.4, provided that a direct exposure or an 
indirect exposure to a covered debt instrument is held for 30 business 
days or less; and
    (2) Has been designated as an excluded covered debt instrument by 
the FDIC-supervised institution that is a subsidiary of a global 
systemically important BHC, as defined in 12 CFR 252.2, pursuant to 12 
CFR 324.22(c)(5)(iv)(A).
* * * * *
    Fiduciary or custodial and safekeeping account means, for purposes 
of Sec.  324.10(c)(2)(x), an account administered by a custody bank for 
which the custody bank provides fiduciary or custodial and safekeeping 
services, as authorized by applicable Federal or state law.
* * * * *
    Indirect exposure means an exposure that arises from the FDIC-
supervised institution's investment in an investment fund which holds 
an investment in the FDIC-supervised institution's own capital 
instrument or an investment in the capital of an unconsolidated 
financial institution. For an advanced approaches FDIC-supervised 
institution, indirect exposure also includes an investment in an 
investment fund that holds a covered debt instrument.
* * * * *
    Investment in a covered debt instrument means an FDIC-supervised 
institution's net long position calculated in accordance with Sec.  
324.22(h) in a covered debt instrument, including direct, indirect, and 
synthetic exposures to the debt instrument, excluding any underwriting 
positions held by the FDIC-supervised institution for five or fewer 
business days.
* * * * *
    Synthetic exposure means an exposure whose value is linked to the 
value of an investment in the FDIC-supervised institution's own capital 
instrument or to the value of an investment in the capital of an 
unconsolidated financial institution. For an advanced approaches FDIC-
supervised institution, synthetic exposure includes an exposure whose 
value is linked to the value of an investment in a covered debt 
instrument.
* * * * *

[[Page 740]]

    Total leverage exposure is defined in Sec.  324.10(c)(2).
* * * * *

0
23. Section 324.10 is amended by:
0
a. Revising paragraph (c);
0
b. Redesignating paragraph (d) as (e); and
0
c. Adding new paragraph (d).
    The revision and addition read as follows:


Sec.  324.10   Minimum capital requirements.

* * * * *
    (c) Supplementary leverage ratio. (1) A Category III FDIC-
supervised institution or advanced approaches FDIC-supervised 
institution must determine its supplementary leverage ratio in 
accordance with this paragraph, beginning with the calendar quarter 
immediately following the quarter in which the FDIC-supervised 
institution is identified as a Category III FDIC-supervised 
institution. An advanced approaches FDIC-supervised institution's or a 
Category III FDIC-supervised institution's supplementary leverage ratio 
is the ratio of its tier 1 capital to total leverage exposure, the 
latter of which is calculated as the sum of:
    (i) The mean of the on-balance sheet assets calculated as of each 
day of the reporting quarter; and
    (ii) The mean of the off-balance sheet exposures calculated as of 
the last day of each of the most recent three months, minus the 
applicable deductions under Sec.  324.22(a), (c), and (d).
    (2) For purposes of this part, total leverage exposure means the 
sum of the items described in paragraphs (c)(2)(i) through (viii) of 
this section, as adjusted pursuant to paragraph (c)(2)(ix) of this 
section for a clearing member FDIC-supervised institution and paragraph 
(c)(2)(x) of this section for a custody bank:
    (i) The balance sheet carrying value of all of the FDIC-supervised 
institution's on-balance sheet assets, plus the value of securities 
sold under a repurchase transaction or a securities lending transaction 
that qualifies for sales treatment under GAAP, less amounts deducted 
from tier 1 capital under Sec.  324.22(a), (c), and (d), and less the 
value of securities received in security-for-security repo-style 
transactions, where the FDIC-supervised institution acts as a 
securities lender and includes the securities received in its on-
balance sheet assets but has not sold or re-hypothecated the securities 
received, and, for an FDIC-supervised institution that uses the 
standardized approach for counterparty credit risk under Sec.  
324.132(c) for its standardized risk-weighted assets, less the fair 
value of any derivative contracts;
    (ii)(A) For an FDIC-supervised institution that uses the current 
exposure methodology under Sec.  324.34(b) for its standardized risk-
weighted assets, the potential future credit exposure (PFE) for each 
derivative contract or each single-product netting set of derivative 
contracts (including a cleared transaction except as provided in 
paragraph (c)(2)(ix) of this section and, at the discretion of the 
FDIC-supervised institution, excluding a forward agreement treated as a 
derivative contract that is part of a repurchase or reverse repurchase 
or a securities borrowing or lending transaction that qualifies for 
sales treatment under GAAP), to which the FDIC-supervised institution 
is a counterparty as determined under Sec.  324.34, but without regard 
to Sec.  324.34(c), provided that:
    (1) An FDIC-supervised institution may choose to exclude the PFE of 
all credit derivatives or other similar instruments through which it 
provides credit protection when calculating the PFE under Sec.  324.34, 
but without regard to Sec.  324.34(c), provided that it does not adjust 
the net-to-gross ratio (NGR); and
    (2) An FDIC-supervised institution that chooses to exclude the PFE 
of credit derivatives or other similar instruments through which it 
provides credit protection pursuant to this paragraph (c)(2)(ii)(A) 
must do so consistently over time for the calculation of the PFE for 
all such instruments; or
    (B)(1) For an FDIC-supervised institution that uses the 
standardized approach for counterparty credit risk under section Sec.  
324.132(c) for its standardized risk-weighted assets, the PFE for each 
netting set to which the FDIC-supervised institution is a counterparty 
(including cleared transactions except as provided in paragraph 
(c)(2)(ix) of this section and, at the discretion of the FDIC-
supervised institution, excluding a forward agreement treated as a 
derivative contract that is part of a repurchase or reverse repurchase 
or a securities borrowing or lending transaction that qualifies for 
sales treatment under GAAP), as determined under Sec.  324.132(c)(7), 
in which the term C in Sec.  324.132(c)(7)(i) equals zero, and, for any 
counterparty that is not a commercial end-user, multiplied by 1.4. For 
purposes of this paragraph (c)(2)(ii)(B)(1), an FDIC-supervised 
institution may set the value of the term C in Sec.  324.132(c)(7)(i) 
equal to the amount of collateral posted by a clearing member client of 
the FDIC-supervised institution in connection with the client-facing 
derivative transactions within the netting set; and
    (2) An FDIC-supervised institution may choose to exclude the PFE of 
all credit derivatives or other similar instruments through which it 
provides credit protection when calculating the PFE under Sec.  
324.132(c), provided that it does so consistently over time for the 
calculation of the PFE for all such instruments;
    (iii)(A)(1) For an FDIC-supervised institution that uses the 
current exposure methodology under Sec.  324.34(b) for its standardized 
risk-weighted assets, the amount of cash collateral that is received 
from a counterparty to a derivative contract and that has offset the 
mark-to-fair value of the derivative asset, or cash collateral that is 
posted to a counterparty to a derivative contract and that has reduced 
the FDIC-supervised institution's on-balance sheet assets, unless such 
cash collateral is all or part of variation margin that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section; 
and
    (2) The variation margin is used to reduce the current credit 
exposure of the derivative contract, calculated as described in Sec.  
324.34(b), and not the PFE; and
    (3) For the purpose of the calculation of the NGR described in 
Sec.  324.34(b)(2)(ii)(B), variation margin described in paragraph 
(c)(2)(iii)(A)(2) of this section may not reduce the net current credit 
exposure or the gross current credit exposure; or
    (B)(1) For an FDIC-supervised institution that uses the 
standardized approach for counterparty credit risk under Sec.  
324.132(c) for its standardized risk-weighted assets, the replacement 
cost of each derivative contract or single product netting set of 
derivative contracts to which the FDIC-supervised institution is a 
counterparty, calculated according to the following formula, and, for 
any counterparty that is not a commercial end-user, multiplied by 1.4:

Replacement Cost = max{V-CVMr + CVMp; 0{time} 

Where:

    V equals the fair value for each derivative contract or each 
single-product netting set of derivative contracts (including a 
cleared transaction except as provided in paragraph (c)(2)(ix) of 
this section and, at the discretion of the FDIC-supervised 
institution, excluding a forward agreement treated as a derivative 
contract that is part of a repurchase or reverse repurchase or a 
securities borrowing or lending transaction that qualifies for sales 
treatment under GAAP);
    CVMr equals the amount of cash collateral received from a 
counterparty to a derivative contract and that satisfies the 
conditions in

[[Page 741]]

paragraphs (c)(2)(iii)(C) through (G) of this section, or, in the 
case of a client-facing derivative transaction on behalf of a 
clearing member client, the amount of collateral received from the 
clearing member client; and
    CVMp equals the amount of cash collateral that is posted to a 
counterparty to a derivative contract and that has not offset the 
fair value of the derivative contract and that satisfies the 
conditions in paragraphs (c)(2)(iii)(C) through (G) of this section, 
or, in the case of a client-facing derivative transaction on behalf 
of a clearing member client, the amount of collateral posted to the 
clearing member client;
    (2) Notwithstanding paragraph (c)(2)(iii)(B)(1) of this section, 
where multiple netting sets are subject to a single variation margin 
agreement, an FDIC-supervised institution must apply the formula for 
replacement cost provided in Sec.  324.132(c)(10)(i), in which the 
term CMA may only include cash collateral that satisfies 
the conditions in paragraphs (c)(2)(iii)(C) through (G) of this 
section; and
    (3) For purposes of paragraph (c)(2)(iii)(B)(1), an FDIC-
supervised institution must treat a derivative contract that 
references an index as if it were multiple derivative contracts each 
referencing one component of the index if the FDIC-supervised 
institution elected to treat the derivative contract as multiple 
derivative contracts under Sec.  324.132(c)(5)(vi);
    (C) For derivative contracts that are not cleared through a 
QCCP, the cash collateral received by the recipient counterparty is 
not segregated (by law, regulation, or an agreement with the 
counterparty);
    (D) Variation margin is calculated and transferred on a daily 
basis based on the mark-to-fair value of the derivative contract;
    (E) The variation margin transferred under the derivative 
contract or the governing rules of the CCP or QCCP for a cleared 
transaction is the full amount that is necessary to fully extinguish 
the net current credit exposure to the counterparty of the 
derivative contracts, subject to the threshold and minimum transfer 
amounts applicable to the counterparty under the terms of the 
derivative contract or the governing rules for a cleared 
transaction;
    (F) The variation margin is in the form of cash in the same 
currency as the currency of settlement set forth in the derivative 
contract, provided that for the purposes of this paragraph 
(c)(2)(iii)(F), currency of settlement means any currency for 
settlement specified in the governing qualifying master netting 
agreement and the credit support annex to the qualifying master 
netting agreement, or in the governing rules for a cleared 
transaction; and
    (G) The derivative contract and the variation margin are 
governed by a qualifying master netting agreement between the legal 
entities that are the counterparties to the derivative contract or 
by the governing rules for a cleared transaction, and the qualifying 
master netting agreement or the governing rules for a cleared 
transaction must explicitly stipulate that the counterparties agree 
to settle any payment obligations on a net basis, taking into 
account any variation margin received or provided under the contract 
if a credit event involving either counterparty occurs;
    (iv) The effective notional principal amount (that is, the 
apparent or stated notional principal amount multiplied by any 
multiplier in the derivative contract) of a credit derivative, or 
other similar instrument, through which the FDIC-supervised 
institution provides credit protection, provided that:
    (A) The FDIC-supervised institution may reduce the effective 
notional principal amount of the credit derivative by the amount of 
any reduction in the mark-to-fair value of the credit derivative if 
the reduction is recognized in common equity tier 1 capital;
    (B) The FDIC-supervised institution may reduce the effective 
notional principal amount of the credit derivative by the effective 
notional principal amount of a purchased credit derivative or other 
similar instrument, provided that the remaining maturity of the 
purchased credit derivative is equal to or greater than the 
remaining maturity of the credit derivative through which the FDIC-
supervised institution provides credit protection and that:
    (1) With respect to a credit derivative that references a single 
exposure, the reference exposure of the purchased credit derivative 
is to the same legal entity and ranks pari passu with, or is junior 
to, the reference exposure of the credit derivative through which 
the FDIC-supervised institution provides credit protection; or
    (2) With respect to a credit derivative that references multiple 
exposures, the reference exposures of the purchased credit 
derivative are to the same legal entities and rank pari passu with 
the reference exposures of the credit derivative through which the 
FDIC-supervised institution provides credit protection, and the 
level of seniority of the purchased credit derivative ranks pari 
passu to the level of seniority of the credit derivative through 
which the FDIC-supervised institution provides credit protection;
    (3) Where an FDIC-supervised institution has reduced the 
effective notional amount of a credit derivative through which the 
FDIC-supervised institution provides credit protection in accordance 
with paragraph (c)(2)(iv)(A) of this section, the FDIC-supervised 
institution must also reduce the effective notional principal amount 
of a purchased credit derivative used to offset the credit 
derivative through which the FDIC-supervised institution provides 
credit protection, by the amount of any increase in the mark-to-fair 
value of the purchased credit derivative that is recognized in 
common equity tier 1 capital; and
    (4) Where the FDIC-supervised institution purchases credit 
protection through a total return swap and records the net payments 
received on a credit derivative through which the FDIC-supervised 
institution provides credit protection in net income, but does not 
record offsetting deterioration in the mark-to-fair value of the 
credit derivative through which the FDIC-supervised institution 
provides credit protection in net income (either through reductions 
in fair value or by additions to reserves), the FDIC-supervised 
institution may not use the purchased credit protection to offset 
the effective notional principal amount of the related credit 
derivative through which the FDIC-supervised institution provides 
credit protection;
    (v) Where an FDIC-supervised institution acting as a principal 
has more than one repo-style transaction with the same counterparty 
and has offset the gross value of receivables due from a 
counterparty under reverse repurchase transactions by the gross 
value of payables under repurchase transactions due to the same 
counterparty, the gross value of receivables associated with the 
repo-style transactions less any on-balance sheet receivables amount 
associated with these repo-style transactions included under 
paragraph (c)(2)(i) of this section, unless the following criteria 
are met:
    (A) The offsetting transactions have the same explicit final 
settlement date under their governing agreements;
    (B) The right to offset the amount owed to the counterparty with 
the amount owed by the counterparty is legally enforceable in the 
normal course of business and in the event of receivership, 
insolvency, liquidation, or similar proceeding; and
    (C) Under the governing agreements, the counterparties intend to 
settle net, settle simultaneously, or settle according to a process 
that is the functional equivalent of net settlement, (that is, the 
cash flows of the transactions are equivalent, in effect, to a 
single net amount on the settlement date), where both transactions 
are settled through the same settlement system, the settlement 
arrangements are supported by cash or intraday credit facilities 
intended to ensure that settlement of both transactions will occur 
by the end of the business day, and the settlement of the underlying 
securities does not interfere with the net cash settlement;
    (vi) The counterparty credit risk of a repo-style transaction, 
including where the FDIC-supervised institution acts as an agent for 
a repo-style transaction and indemnifies the customer with respect 
to the performance of the customer's counterparty in an amount 
limited to the difference between the fair value of the security or 
cash its customer has lent and the fair value of the collateral the 
borrower has provided, calculated as follows:
    (A) If the transaction is not subject to a qualifying master 
netting agreement, the counterparty credit risk (E*) for 
transactions with a counterparty must be calculated on a transaction 
by transaction basis, such that each transaction i is treated as its 
own netting set, in accordance with the following formula, where 
Ei is the fair value of the instruments, gold, or cash 
that the FDIC-supervised institution has lent, sold subject to 
repurchase, or provided as collateral to the counterparty, and 
Ci is the fair value of the instruments, gold, or cash 
that the FDIC-supervised institution has borrowed, purchased subject 
to resale, or received as collateral from the counterparty:

Ei* = max {0, [Ei - Ci]{time} ; and

    (B) If the transaction is subject to a qualifying master netting 
agreement, the counterparty credit risk (E*) must be calculated as 
the greater of zero and the total

[[Page 742]]

fair value of the instruments, gold, or cash that the FDIC-
supervised institution has lent, sold subject to repurchase or 
provided as collateral to a counterparty for all transactions 
included in the qualifying master netting agreement 
([Sigma]Ei), less the total fair value of the 
instruments, gold, or cash that the FDIC-supervised institution 
borrowed, purchased subject to resale or received as collateral from 
the counterparty for those transactions ([Sigma]Ci), in 
accordance with the following formula:

E* = max {0, [[Sigma]Ei - [Sigma]Ci]{time} 

    (vii) If an FDIC-supervised institution acting as an agent for a 
repo-style transaction provides a guarantee to a customer of the 
security or cash its customer has lent or borrowed with respect to 
the performance of the customer's counterparty and the guarantee is 
not limited to the difference between the fair value of the security 
or cash its customer has lent and the fair value of the collateral 
the borrower has provided, the amount of the guarantee that is 
greater than the difference between the fair value of the security 
or cash its customer has lent and the value of the collateral the 
borrower has provided;
    (viii) The credit equivalent amount of all off-balance sheet 
exposures of the FDIC-supervised institution, excluding repo-style 
transactions, repurchase or reverse repurchase or securities 
borrowing or lending transactions that qualify for sales treatment 
under GAAP, and derivative transactions, determined using the 
applicable credit conversion factor under Sec.  324.33(b), provided, 
however, that the minimum credit conversion factor that may be 
assigned to an off-balance sheet exposure under this paragraph is 10 
percent; and
    (ix) For an FDIC-supervised institution that is a clearing 
member:
    (A) A clearing member FDIC-supervised institution that 
guarantees the performance of a clearing member client with respect 
to a cleared transaction must treat its exposure to the clearing 
member client as a derivative contract for purposes of determining 
its total leverage exposure;
    (B) A clearing member FDIC-supervised institution that 
guarantees the performance of a CCP with respect to a transaction 
cleared on behalf of a clearing member client must treat its 
exposure to the CCP as a derivative contract for purposes of 
determining its total leverage exposure;
    (C) A clearing member FDIC-supervised institution that does not 
guarantee the performance of a CCP with respect to a transaction 
cleared on behalf of a clearing member client may exclude its 
exposure to the CCP for purposes of determining its total leverage 
exposure;
    (D) An FDIC-supervised institution that is a clearing member may 
exclude from its total leverage exposure the effective notional 
principal amount of credit protection sold through a credit 
derivative contract, or other similar instrument, that it clears on 
behalf of a clearing member client through a CCP as calculated in 
accordance with paragraph (c)(2)(iv) of this section; and
    (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this 
section, an FDIC-supervised institution may exclude from its total 
leverage exposure a clearing member's exposure to a clearing member 
client for a derivative contract, if the clearing member client and 
the clearing member are affiliates and consolidated for financial 
reporting purposes on the FDIC-supervised institution's balance 
sheet.
    (x) A custody bank shall exclude from its total leverage 
exposure the lesser of:
    (A) The amount of funds that the custody bank has on deposit at 
a qualifying central bank; and
    (B) The amount of funds in deposit accounts at the custody bank 
that are linked to fiduciary or custodial and safekeeping accounts 
at the custody bank. For purposes of this paragraph (c)(2)(x), a 
deposit account is linked to a fiduciary or custodial and 
safekeeping account if the deposit account is provided to a client 
that maintains a fiduciary or custodial and safekeeping account with 
the custody bank, and the deposit account is used to facilitate the 
administration of the fiduciary or custodial and safekeeping 
account.
    (d) Advanced approaches capital ratio calculations. An advanced 
approaches FDIC-supervised institution that has completed the 
parallel run process and received notification from the FDIC 
pursuant to Sec.  324.121(d) must determine its regulatory capital 
ratios as described in paragraphs (d)(1) through (3) of this 
section.
    (1) Common equity tier 1 capital ratio. The FDIC-supervised 
institution's common equity tier 1 capital ratio is the lower of:
    (i) The ratio of the FDIC-supervised institution's common equity 
tier 1 capital to standardized total risk-weighted assets; and
    (ii) The ratio of the FDIC-supervised institution's common 
equity tier 1 capital to advanced approaches total risk-weighted 
assets.
    (2) Tier 1 capital ratio. The FDIC-supervised institution's tier 
1 capital ratio is the lower of:
    (i) The ratio of the FDIC-supervised institution's tier 1 
capital to standardized total risk-weighted assets; and
    (ii) The ratio of the FDIC-supervised institution's tier 1 
capital to advanced approaches total risk-weighted assets.
    (3) Total capital ratio. The FDIC-supervised institution's total 
capital ratio is the lower of:
    (i) The ratio of the FDIC-supervised institution's total capital 
to standardized total risk-weighted assets; and
    (ii) The ratio of the FDIC-supervised institution's advanced-
approaches-adjusted total capital to advanced approaches total risk-
weighted assets. An FDIC-supervised institution's advanced-
approaches-adjusted total capital is the FDIC-supervised 
institution's total capital after being adjusted as follows:
    (A) An advanced approaches FDIC-supervised institution must 
deduct from its total capital any allowance for loan and lease 
losses or adjusted allowance for credit losses, as applicable, 
included in its tier 2 capital in accordance with Sec.  
324.20(d)(3); and
    (B) An advanced approaches FDIC-supervised institution must add 
to its total capital any eligible credit reserves that exceed the 
FDIC-supervised institution's total expected credit losses to the 
extent that the excess reserve amount does not exceed 0.6 percent of 
the FDIC-supervised institution's credit risk-weighted assets.
    (4) State savings association tangible capital ratio. (i) Until 
January 1, 2014, a state savings association shall determine its 
tangible capital ratio in accordance with 12 CFR 390.468.
    (ii) As of January 1, 2014, a state savings association's 
tangible capital ratio is the ratio of the state savings 
association's core capital (tier 1 capital) to total assets. For 
purposes of this paragraph, the term total assets shall have the 
meaning provided in 12 CFR 324.401(g).
* * * * *

0
24. In Sec.  324.22, revise paragraphs (c), (f), and (h) to read as 
follows:


Sec.  324.22   Regulatory capital adjustments and deductions.

* * * * *
    (c) Deductions from regulatory capital related to investments in 
capital instruments or covered debt instruments \23\--(1) Investment in 
the FDIC-supervised institution's own capital instruments. An FDIC-
supervised institution must deduct an investment in its own capital 
instruments, as follows:
---------------------------------------------------------------------------

    \23\ The FDIC-supervised institution must calculate amounts 
deducted under paragraphs (c) through (f) of this section after it 
calculates the amount of ALLL or AACL, as applicable, includable in 
tier 2 capital under Sec.  324.20(d)(3).
---------------------------------------------------------------------------

    (i) An FDIC-supervised institution must deduct an investment in the 
FDIC-supervised institution's own common stock instruments from its 
common equity tier 1 capital elements to the extent such instruments 
are not excluded from regulatory capital under Sec.  324.20(b)(1);
    (ii) An FDIC-supervised institution must deduct an investment in 
the FDIC-supervised institution's own additional tier 1 capital 
instruments from its additional tier 1 capital elements; and
    (iii) An FDIC-supervised institution must deduct an investment in 
the FDIC-supervised institution's own tier 2 capital instruments from 
its tier 2 capital elements.
    (2) Corresponding deduction approach. For purposes of subpart C of 
this part, the corresponding deduction approach is the methodology used 
for the deductions from regulatory capital related to reciprocal cross 
holdings (as described in paragraph (c)(3) of this section), 
investments in the capital of unconsolidated financial institutions for 
an FDIC-supervised institution that is not an advanced approaches FDIC-
supervised institution (as described in paragraph (c)(4) of this 
section), non-significant investments in the capital of unconsolidated 
financial institutions for

[[Page 743]]

an advanced approaches FDIC-supervised institution (as described in 
paragraph (c)(5) of this section), and non-common stock significant 
investments in the capital of unconsolidated financial institutions for 
an advanced approaches FDIC-supervised institution (as described in 
paragraph (c)(6) of this section). Under the corresponding deduction 
approach, an FDIC-supervised institution must make deductions from the 
component of capital for which the underlying instrument would qualify 
if it were issued by the FDIC-supervised institution itself, as 
described in paragraphs (c)(2)(i) through (iii) of this section. If the 
FDIC-supervised institution does not have a sufficient amount of a 
specific component of capital to effect the required deduction, the 
shortfall must be deducted according to paragraph (f) of this section.
    (i) If an investment is in the form of an instrument issued by a 
financial institution that is not a regulated financial institution, 
the FDIC-supervised institution must treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
or represents the most subordinated claim in a liquidation of the 
financial institution; and
    (B) An additional tier 1 capital instrument if it is subordinated 
to all creditors of the financial institution and is senior in 
liquidation only to common shareholders.
    (ii) If an investment is in the form of an instrument issued by a 
regulated financial institution and the instrument does not meet the 
criteria for common equity tier 1, additional tier 1 or tier 2 capital 
instruments under Sec.  324.20, the FDIC-supervised institution must 
treat the instrument as:
    (A) A common equity tier 1 capital instrument if it is common stock 
included in GAAP equity or represents the most subordinated claim in 
liquidation of the financial institution;
    (B) An additional tier 1 capital instrument if it is included in 
GAAP equity, subordinated to all creditors of the financial 
institution, and senior in a receivership, insolvency, liquidation, or 
similar proceeding only to common shareholders;
    (C) A tier 2 capital instrument if it is not included in GAAP 
equity but considered regulatory capital by the primary supervisor of 
the financial institution; and
    (D) For an advanced approaches FDIC-supervised institution, a tier 
2 capital instrument if it is a covered debt instrument.
    (iii) If an investment is in the form of a non-qualifying capital 
instrument (as defined in Sec.  324.300(c)), the FDIC-supervised 
institution must treat the instrument as:
    (A) An additional tier 1 capital instrument if such instrument was 
included in the issuer's tier 1 capital prior to May 19, 2010; or
    (B) A tier 2 capital instrument if such instrument was included in 
the issuer's tier 2 capital (but not includable in tier 1 capital) 
prior to May 19, 2010.
    (3) Reciprocal cross holdings in the capital of financial 
institutions. (i) An FDIC-supervised institution must deduct an 
investment in the capital of other financial institutions that it holds 
reciprocally, where such reciprocal cross holdings result from a formal 
or informal arrangement to swap, exchange, or otherwise intend to hold 
each other's capital instruments, by applying the corresponding 
deduction approach in paragraph (c)(2) of this section.
    (ii) An advanced approaches FDIC-supervised institution must deduct 
an investment in any covered debt instrument that the institution holds 
reciprocally with another financial institution, where such reciprocal 
cross holdings result from a formal or informal arrangement to swap, 
exchange, or otherwise intend to hold each other's capital or covered 
debt instruments, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.
    (4) Investments in the capital of unconsolidated financial 
institutions. An FDIC-supervised institution that is not an advanced 
approaches FDIC-supervised institution must deduct its investments in 
the capital of unconsolidated financial institutions (as defined in 
Sec.  324.2) that exceed 25 percent of the sum of the FDIC-supervised 
institution's common equity tier 1 capital elements minus all 
deductions from and adjustments to common equity tier 1 capital 
elements required under paragraphs (a) through (c)(3) of this section 
by applying the corresponding deduction approach in paragraph (c)(2) of 
this section.\24\ The deductions described in this section are net of 
associated DTLs in accordance with paragraph (e) of this section. In 
addition, with the prior written approval of the FDIC, an FDIC-
supervised institution that underwrites a failed underwriting, for the 
period of time stipulated by the FDIC, is not required to deduct an 
investment in the capital of an unconsolidated financial institution 
pursuant to this paragraph (c) to the extent the investment is related 
to the failed underwriting.\25\
---------------------------------------------------------------------------

    \24\ With the prior written approval of the FDIC, for the period 
of time stipulated by the FDIC, an FDIC-supervised institution that 
is not an advanced approaches FDIC-supervised institution, is not 
required to deduct an investment in the capital of an unconsolidated 
financial institution pursuant to this paragraph if the financial 
institution is in distress and if such investment is made for the 
purpose of providing financial support to the financial institution, 
as determined by the FDIC.
    \25\ Any investments in the capital of an unconsolidated 
financial institution that do not exceed the 25 percent threshold 
for investments in the capital of unconsolidated financial 
institutions under this section must be assigned the appropriate 
risk weight under subparts D or F of this part, as applicable.
---------------------------------------------------------------------------

    (5) Non-significant investments in the capital of unconsolidated 
financial institutions. (i) An advanced approaches FDIC-supervised 
institution must deduct its non-significant investments in the capital 
of unconsolidated financial institutions (as defined in Sec.  324.2) 
that, in the aggregate and together with any investment in a covered 
debt instrument (as defined in Sec.  324.2) issued by a financial 
institution in which the FDIC-supervised institution does not have a 
significant investment in the capital of the unconsolidated financial 
institution (as defined in Sec.  324.2), exceeds 10 percent of the sum 
of the advanced approaches FDIC-supervised institution's common equity 
tier 1 capital elements minus all deductions from and adjustments to 
common equity tier 1 capital elements required under paragraphs (a) 
through (c)(3) of this section (the 10 percent threshold for non-
significant investments) by applying the corresponding deduction 
approach in paragraph (c)(2) of this section.\26\ The deductions 
described in this paragraph are net of associated DTLs in accordance 
with paragraph (e) of this section. In addition, with the prior written 
approval of the FDIC, an advanced approaches FDIC-supervised 
institution that underwrites a failed underwriting, for the period of 
time stipulated by the FDIC, is not required to deduct from capital a 
non-significant investment in the capital of an unconsolidated 
financial institution or an investment in a covered debt instrument 
pursuant to this paragraph (c)(5) to the extent the investment is 
related to the failed

[[Page 744]]

underwriting.\27\ For any calculation under this paragraph (c)(5)(i), 
an advanced approaches FDIC-supervised institution may exclude the 
amount of an investment in a covered debt instrument under paragraph 
(c)(5)(iii) or (iv) of this section, as applicable.
---------------------------------------------------------------------------

    \26\ With the prior written approval of the FDIC, for the period 
of time stipulated by the FDIC, an advanced approaches FDIC-
supervised institution is not required to deduct a non-significant 
investment in the capital of an unconsolidated financial institution 
or an investment in a covered debt instrument pursuant to this 
paragraph if the financial institution is in distress and if such 
investment is made for the purpose of providing financial support to 
the financial institution, as determined by the FDIC.
    \27\ Any non-significant investment in the capital of an 
unconsolidated financial institution or any investment in a covered 
debt instrument that is not required to be deducted under this 
paragraph (c)(5) or otherwise under this section must be assigned 
the appropriate risk weight under subparts D, E, or F of this part, 
as applicable.
---------------------------------------------------------------------------

    (ii) For an advanced approaches FDIC-supervised institution, the 
amount to be deducted under this paragraph (c)(5) from a specific 
capital component is equal to:
    (A) The advanced approaches FDIC-supervised institution's aggregate 
non-significant investments in the capital of an unconsolidated 
financial institution and, if applicable, any investments in a covered 
debt instrument subject to deduction under this paragraph (c)(5), 
exceeding the 10 percent threshold for non-significant investments, 
multiplied by
    (B) The ratio of the advanced approaches FDIC-supervised 
institution's aggregate non-significant investments in the capital of 
an unconsolidated financial institution (in the form of such capital 
component) to the advanced approaches FDIC-supervised institution's 
total non-significant investments in unconsolidated financial 
institutions, with an investment in a covered debt instrument being 
treated as tier 2 capital for this purpose.
    (iii) For purposes of applying the deduction under paragraph 
(c)(5)(i) of this section, an advanced approaches FDIC-supervised 
institution that is not a subsidiary of a global systemically important 
banking organization, as defined in 12 CFR 252.2, may exclude from the 
deduction the amount of the FDIC-supervised institution's gross long 
position, in accordance with Sec.  324.22(h)(2), in investments in 
covered debt instruments issued by financial institutions in which the 
FDIC-supervised institution does not have a significant investment in 
the capital of the unconsolidated financial institutions up to an 
amount equal to 5 percent of the sum of the FDIC-supervised 
institution's common equity tier 1 capital elements minus all 
deductions from and adjustments to common equity tier 1 capital 
elements required under paragraphs (a) through (c)(3) of this section, 
net of associated DTLs in accordance with paragraph (e) of this 
section.
    (iv) Prior to applying the deduction under paragraph (c)(5)(i) of 
this section:
    (A) An FDIC-supervised institution that is a subsidiary of a global 
systemically important BHC, as defined in 12 CFR 252.2, may designate 
any investment in a covered debt instrument as an excluded covered debt 
instrument, as defined in Sec.  324.2.
    (B) An FDIC-supervised institution that is a subsidiary of a global 
systemically important BHC, as defined in 12 CFR 252.2, must deduct, 
according to the corresponding deduction approach in paragraph (c)(2) 
of this section, its gross long position, calculated in accordance with 
paragraph (h)(2) of this section, in a covered debt instrument that was 
originally designated as an excluded covered debt instrument, in 
accordance with paragraph (c)(5)(iv)(A) of this section, but no longer 
qualifies as an excluded covered debt instrument.
    (C) An FDIC-supervised institution that is a subsidiary of a global 
systemically important BHC, as defined in 12 CFR 252.2, must deduct 
according to the corresponding deduction approach in paragraph (c)(2) 
of this section the amount of its gross long position, calculated in 
accordance with paragraph (h)(2) of this section, in a direct or 
indirect investment in a covered debt instrument that was originally 
designated as an excluded covered debt instrument, in accordance with 
paragraph (c)(5)(iv)(A) of this section, and has been held for more 
than thirty business days.
    (D) An FDIC-supervised institution that is a subsidiary of a global 
systemically important BHC, as defined in 12 CFR 252.2, must deduct 
according to the corresponding deduction approach in paragraph (c)(2) 
of this section its gross long position, calculated in accordance with 
paragraph (h)(2) of this section, of its aggregate position in excluded 
covered debt instruments that exceeds 5 percent of the sum of the FDIC-
supervised institution's common equity tier 1 capital elements minus 
all deductions from and adjustments to common equity tier 1 capital 
elements required under paragraphs (a) through (c)(3) of this section, 
net of associated DTLs in accordance with paragraph (e) of this 
section.
    (6) Significant investments in the capital of unconsolidated 
financial institutions that are not in the form of common stock. If an 
advanced approaches FDIC-supervised institution has a significant 
investment in the capital of an unconsolidated financial institution, 
the advanced approaches FDIC-supervised institution must deduct from 
capital any such investment issued by the unconsolidated financial 
institution that is held by the FDIC-supervised institution other than 
an investment in the form of common stock, as well as any investment in 
a covered debt instrument issued by the unconsolidated financial 
institution, by applying the corresponding deduction approach in 
paragraph (c)(2) of this section.\28\ The deductions described in this 
section are net of associated DTLs in accordance with paragraph (e) of 
this section. In addition, with the prior written approval of the FDIC, 
for the period of time stipulated by the FDIC, an advanced approaches 
FDIC-supervised institution that underwrites a failed underwriting is 
not required to deduct the significant investment in the capital of an 
unconsolidated financial institution or an investment in a covered debt 
instrument pursuant to this paragraph (c)(6) if such investment is 
related to such failed underwriting.
---------------------------------------------------------------------------

    \28\ With prior written approval of the FDIC, for the period of 
time stipulated by the FDIC, an advanced approaches FDIC-supervised 
institution is not required to deduct a significant investment in 
the capital of an unconsolidated financial institution, including an 
investment in a covered debt instrument, under this paragraph (c)(6) 
or otherwise under this section if such investment is made for the 
purpose of providing financial support to the financial institution 
as determined by the FDIC.
---------------------------------------------------------------------------

* * * * *
    (f) Insufficient amounts of a specific regulatory capital component 
to effect deductions. Under the corresponding deduction approach, if an 
FDIC-supervised institution does not have a sufficient amount of a 
specific component of capital to effect the full amount of any 
deduction from capital required under paragraph (d) of this section, 
the FDIC-supervised institution must deduct the shortfall amount from 
the next higher (that is, more subordinated) component of regulatory 
capital. Any investment by an advanced approaches FDIC-supervised 
institution in a covered debt instrument must be treated as an 
investment in the tier 2 capital for purposes of this paragraph (f). 
Notwithstanding any other provision of this section, a qualifying 
community banking organization (as defined in Sec.  324.12) that has 
elected to use the community bank leverage ratio framework pursuant to 
Sec.  324.12 is not required to deduct any shortfall of tier 2 capital 
from its additional tier 1 capital or common equity tier 1 capital.
* * * * *
    (h) Net long position--(1) In general. For purposes of calculating 
the amount of an FDIC-supervised institution's investment in the FDIC-
supervised

[[Page 745]]

institution's own capital instrument, investment in the capital of an 
unconsolidated financial institution, and investment in a covered debt 
instrument under this section, the institution's net long position is 
the gross long position in the underlying instrument determined in 
accordance with paragraph (h)(2) of this section, as adjusted to 
recognize any short position by the FDIC-supervised institution in the 
same instrument subject to paragraph (h)(3) of this section.
    (2) Gross long position. A gross long position is determined as 
follows:
    (i) For an equity exposure that is held directly by the FDIC-
supervised institution, the adjusted carrying value of the exposure as 
that term is defined in Sec.  324.51(b);
    (ii) For an exposure that is held directly and that is not an 
equity exposure or a securitization exposure, the exposure amount as 
that term is defined in Sec.  324.2;
    (iii) For each indirect exposure, the FDIC-supervised institution's 
carrying value of its investment in an investment fund or, 
alternatively:
    (A) An FDIC-supervised institution may, with the prior approval of 
the FDIC, use a conservative estimate of the amount of its indirect 
investment in the FDIC-supervised institution's own capital 
instruments, its indirect investment in the capital of an 
unconsolidated financial institution, or its indirect investment in a 
covered debt instrument held through a position in an index, as 
applicable; or
    (B) An FDIC-supervised institution may calculate the gross long 
position for an indirect exposure to the FDIC-supervised institution's 
own capital instruments, the capital of an unconsolidated financial 
institution, or a covered debt instrument by multiplying the FDIC-
supervised institution's carrying value of its investment in the 
investment fund by either:
    (1) The highest stated investment limit (in percent) for an 
investment in the FDIC-supervised institution's own capital 
instruments, an investment in the capital of an unconsolidated 
financial institution, or an investment in a covered debt instrument, 
as applicable, as stated in the prospectus, partnership agreement, or 
similar contract defining permissible investments of the investment 
fund; or
    (2) The investment fund's actual holdings (in percent) of the 
investment in the FDIC-supervised institution's own capital 
instruments, investment in the capital of an unconsolidated financial 
institution, or investment in a covered debt instrument, as applicable; 
and
    (iv) For a synthetic exposure, the amount of the FDIC-supervised 
institution's loss on the exposure if the reference capital or covered 
debt instrument were to have a value of zero.
    (3) Adjustments to reflect a short position. In order to adjust the 
gross long position to recognize a short position in the same 
instrument under paragraph (h)(1) of this section, the following 
criteria must be met:
    (i) The maturity of the short position must match the maturity of 
the long position, or the short position must have a residual maturity 
of at least one year (maturity requirement); or
    (ii) For a position that is a trading asset or trading liability 
(whether on- or off-balance sheet) as reported on the FDIC-supervised 
institution's Call Report, if the FDIC-supervised institution has a 
contractual right or obligation to sell the long position at a specific 
point in time and the counterparty to the contract has an obligation to 
purchase the long position if the FDIC-supervised institution exercises 
its right to sell, this point in time may be treated as the maturity of 
the long position such that the maturity of the long position and short 
position are deemed to match for purposes of the maturity requirement, 
even if the maturity of the short position is less than one year; and
    (iii) For an investment in an FDIC-supervised institution's own 
capital instrument under paragraph (c)(1) of this section, an 
investment in the capital of an unconsolidated financial institution 
under paragraphs (c)(4) through (6) and (d) of this section (as 
applicable), and an investment in a covered debt instrument under 
paragraphs (c)(1), (5), and (6) of this section:
    (A) The FDIC-supervised institution may only net a short position 
against a long position in an investment in the FDIC-supervised 
institution's own capital instrument under paragraph (c)(1) of this 
section if the short position involves no counterparty credit risk;
    (B) A gross long position in an investment in the FDIC-supervised 
institution's own capital instrument, an investment in the capital of 
an unconsolidated financial institution, or an investment in a covered 
debt instrument due to a position in an index may be netted against a 
short position in the same index;
    (C) Long and short positions in the same index without maturity 
dates are considered to have matching maturities; and
    (D) A short position in an index that is hedging a long cash or 
synthetic position in an investment in the FDIC-supervised 
institution's own capital instrument, an investment in the capital 
instrument of an unconsolidated financial institution, or an investment 
in a covered debt instrument can be decomposed to provide recognition 
of the hedge. More specifically, the portion of the index that is 
composed of the same underlying instrument that is being hedged may be 
used to offset the long position if both the long position being hedged 
and the short position in the index are reported as a trading asset or 
trading liability (whether on- or off-balance sheet) on the FDIC-
supervised institution's Call Report, and the hedge is deemed effective 
by the FDIC-supervised institution's internal control processes, which 
have not been found to be inadequate by the FDIC.


Sec.  324.121  [Amended]

0
25. Section 324.121 is amended by removing ``Sec.  324.10(c)(1) through 
(3)'' and adding ``Sec.  324.10(d)(1) through (3)'' in paragraph (c).


Sec.  324.132  [Amended]

0
6. Section 324.132 is amended by removing ``Sec.  324.10(c)(4)(ii)(B)'' 
and adding ``Sec.  324.10(c)(2)(ii)(B)'' in paragraph (c)(7)(iii) and 
(iv).


Sec.  324.304  [Amended]

0
27. Section 324.304 is amended by:
0
a. Removing ``Sec.  324.10(c)(4)'' and adding in its place ``Sec.  
324.10(c)'' in paragraph (a) introductory text; and
0
b. Removing ``Sec.  324.10(c)(4)(ii)(J)(1)'' and adding in its place 
``Sec.  324.10(c)(2)(x)(A)'' in paragraph (e).

Brian P. Brooks,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on or about October 20, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-27046 Filed 1-5-21; 8:45 am]
BILLING CODE 4810-33-6210-01-6714-01-P

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