Code of Colorado Regulations
700 - Department of Regulatory Agencies
701 - Division of Banking
3 CCR 701-6 - TRUST COMPANIES
Appendix A - MARKET RISK

Current through Register Vol. 47, No. 5, March 10, 2024

A. Purpose and Applicability.

1. The purpose of this Appendix is to ensure that institutions with significant exposure to market risk maintain adequate capital to support that exposure. This Appendix supplements and adjusts the risk-based capital ratio calculations under this Rule with respect to those institutions.

2. Applicability.

a. This Appendix applies to any institution whose trading activity (on a worldwide consolidated basis) equals:

(1) Ten percent of more of total assets as reported in the most recent Call Report; or

(2) One billon dollars or more.

NOTE: Trading activity means the gross sum of trading assets and liabilities as reported in the institution's most recent quarterly Call Report.

b. The Banking Board may apply this Appendix to any institution if it deems it necessary or appropriate for safe and sound practices.

c. The Banking Board may exclude any institution otherwise meeting the criteria from Paragraph (A)(2)(a) of this Appendix from coverage under this Appendix if it determines the institution meets such criteria as a consequence of accounting, operational, or similar considerations, and the Banking Board deems it consistent with safe and sound practices.

B. Definitions

1. "Covered position" means all positions in an institution's trading account, and all foreign exchange and commodity positions, whether or not in the trading account. Positions include on-balance sheet assets and liabilities and off-balance sheet items. Securities subject to repurchase and lending agreements are included as if they are still owned by the lender. Asset-backed commercial paper liquidity facilities, in form or in substance, in an institution's trading account are excluded from covered positions, and instead, are subject to the risk-based capital requirements as provided in this Rule. (Subject to supervisory review, an institution may exclude structural positions in foreign currencies from its covered positions.)

2. "Market risk" means the risk of loss resulting from movements in market prices. Market risk consists of general market risk and specific risk components.

a. "General market risk" means changes in the market value of covered positions resulting from broad market movements, such as changes in the general level of interest rates, equity prices, foreign exchange rates, or commodity prices.

b. "Specific risk" means changes in the market value of specific positions due to factors other than broad market movements and includes default and event risk as well as idiosyncratic variations.

3. Tier 1 and Tier 2 capital are defined in Paragraph (C) of this Rule.

4. Tier 3 capital is subordinated debt that is unsecured; is fully paid up; has an original maturity of at least two years; is not redeemable before maturity without prior approval by the Banking Board; includes a lock-in clause precluding payment of either interest or principle (even at maturity) if the payment would cause the issuing institution's risk-based capital ratio to fall or remain below the minimum required under this Rule; and does not contain and is not covered by any covenants, terms, or restrictions that are inconsistent with safe and sound practices.

5. "Value-at-risk (VAR)" means the estimate of the maximum amount that the value of covered positions could decline during a fixed holding period within a stated confidence level, measured pursuant to Paragraph (D) of this Appendix.

C. Adjustments to the Risk-Based Capital Ratio Calculations

1. Risk-based capital ratio denominator. An institution subject to this Appendix shall calculate its risk-based capital ratio denominator as follows:

a. Adjusted risk-weighted assets.

(1) Covered positions. Calculate adjusted risk-weighted assets, which equals risk-weighted assets (as calculated pursuant to this Rule), excluding the risk-weighted amounts of all covered positions (except foreign exchange positions outside the trading account and over-the-counter derivative positions). (Foreign exchange positions outside the trading account and all over-the-counter derivative positions, whether or not in the trading account, must be included in adjusted risk-weighted assets).

(2) Securities borrowing transactions. In calculating adjusted risk-weighted assets, an institution also may exclude a receivable that results from the institution's posting of cash collateral in a securities borrowing transaction to the extent that the receivable is collateralized by the market value of the borrowed securities and is subject to the following conditions:

(a) The borrowed securities must be includable in the trading account and must be liquid and readily marketable;

(b) The borrowed securities must be marked to market daily;

(c) The receivable must be subject to a daily margining requirement; and

(d) The securities borrowing transaction must be a securities contract for purposes of section 555 of the Bankruptcy Code, a qualified financial contract for purposes of section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions, for purposes of section 401-407 of the Federal Deposit Insurance Corporation Improvement Act of 1991 or Regulation EE.

b. Measure for market risk. Calculate the measure for market risk, which equals the sum of the VAR-based capital charge, the specific risk add-on (if any), and the capital charge for de minimus exposures (if any).

(1) VAR-based capital charge. The VAR-based capital charge equals the higher of:

(a) The previous day's VAR measure; or

(b) The average of the daily VAR measures for each of the preceding sixty (60) business days multiplied by three, except as provided in Paragraph (D)(5) of this Appendix;

(2) Specific risk add-on. The specific risk add-on is calculated pursuant to Paragraph (E) of this Appendix; and

(3) Capital charge for de minimus exposure. The capital charge for de minimus exposure is calculated pursuant to Paragraph (D)(1) of this Appendix.

c. Market risk equivalent assets. Calculate market risk equivalent assets by multiplying the measure for market risk (as calculated in Paragraph (C)(1)(b) of this Appendix) by 12.5.

d. Denominator calculation. Add market risk equivalent assets (as calculated in Paragraph (C)(1)(c) of this Appendix) to adjusted risk-weighted assets (as calculated in Paragraph (C)(1)(a) of this Appendix). The resulting sum is the institution's risk-based capital ratio denominator.

2. Risk-based capital ratio numerator. An institution subject to this Appendix shall calculate its risk-based capital ratio numerator by allocating capital as follows:

a. Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal to 8.0 percent of adjusted risk-weighted assets (as calculated in Paragraph (C)(1)(a) of this Appendix).

(An institution may not allocate Tier 3 capital to support credit risk.)

b. Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3 capital equal to the measure for market risk as calculated in Paragraph (C)(1)(b) of this Appendix. The sum of Tier 2 and Tier 3 capital allocated for market risk must not exceed 250 percent of Tier 1 capital allocated for market risk. (This requirement means that Tier 1 capital allocated in this Paragraph must equal at least 28.6 percent of the measure for market risk.)

c. Restrictions.

(1) The sum of Tier 2 capital (both allocated and excess) and Tier 3 capital (allocated in Paragraph (C)(2)(b) of this Appendix) may not exceed 100 percent of Tier 1 capital (both allocated and excess).

(Excess Tier 1 capital means Tier 1 capital that has not been allocated in Paragraphs (C)(2)(a) and (b) of this Appendix. Excess Tier 2 capital means Tier 2 capital that has not been allocated in Paragraphs (C)(2)(a) and (b) of this Appendix, subject to the restrictions in Paragraph (C)(2)(c) of this Appendix.)

(2) Term subordinated debt (and intermediate-term preferred stock and related surplus) included in Tier 2 capital (both allocated and excess) may not exceed 50 percent of Tier 1 capital (both allocated and excess).

d. Numerator calculation. Add Tier 1 capital (both allocated and excess), Tier 2

capital (both allocated and excess), and Tier 3 capital (allocated under Paragraph (C)(2)(b) of this Appendix). The resulting sum is the institution's risk-based capital ratio numerator.

D. Internal Models

1. General. For risk-based capital purposes, an institution subject to this Appendix must use its internal model to measure its daily VAR, pursuant to the requirements of this Appendix. The Banking Board may permit an institution to use alternative techniques to measure the market risk of de minimus exposures so long as the techniques adequately measure associated market risk.

(An institution's internal model may use any generally accepted measurement techniques, such as variance-covariance models, historical simulations, or Monte Carlo simulations. However, the level of sophistication and accuracy of an institution's internal model must be commensurate with the nature and size of its covered positions. An institution that modifies its existing modeling procedures to comply with the requirements of this Appendix for risk-based capital purposes should, nonetheless, continue to use the internal model it considers most appropriate in evaluating risks for other purposes.)

2. Qualitative requirements. An institution subject to this Appendix must have a risk management system that meets the following minimum qualitative requirements:

a. The institution must have a risk control unit that reports directly to senior management and is independent from business trading units.

b. The institution's internal risk measurement model must be integrated into the daily management process.

c. The institution's policies and procedures must identify, and the institution must conduct, appropriate stress tests and backtests. The institution's policies and procedures must identify the procedures to follow in response to the results of such tests.

(Stress tests provide information about the impact of adverse market events on an institution's covered positions. Backtests provide information about the accuracy of an internal model by comparing an institution's daily VAR measures to its corresponding daily trading profits and losses.)

d. The institution must conduct independent reviews of its risk measurement and risk management systems at least annually.

3. Market risk factors. The institution's internal model must use risk factors sufficient to measure the market risk inherent in all covered positions. The risk factors must address interest rate risk, equity price risk, foreign exchange rate risk, and commodity price risk.

(For material exposures in the major currencies and markets, modeling techniques must capture spread risk and must incorporate enough segments of the yield curve--at least six--to capture differences in volatility and less than perfect correlation of rates along the yield curve.)

4. Quantitative requirements. For regulatory capital purposes, VAR measures must meet the following quantitative requirements:

a. The VAR measures must be calculated on a daily basis using a 99 percent, one-tailed confidence level with a price shock equivalent to a ten (10) business day movement in rates and prices. In order to calculate VAR measures based on a ten (10) day price shock, the institution may either calculate ten (10) day figures directly or convert VAR figures based on holding periods other than ten (10) days to the equivalent of a ten (10) day holding period (for instance, by multiplying a one (1) day VAR measure by the square root of ten).

b. The VAR measures must be based on an historical observation period (or effective observation period for an institution using a weighting scheme or other similar method) of at least one (1) year. The institution must update data sets at least once every three (3) months or more frequently as market conditions warrant.

c. The VAR measurements must include the risks arising from the non-linear price characteristics of options positions and the sensitivity of the market value of the positions to changes in the volatility of the underlying rates or prices. An institution with a large or complex options portfolio must measure the volatility of options positions by different maturities.

d. The VAR measures may incorporate empirical correlations within and across risk categories, provided that the institution's process for measuring correlations is sound. In the event that the VAR measures do not incorporate empirical correlations across risk categories, then the institution must add the separate VAR measures for the four major risk categories to determine its aggregate VAR measure.

5. Backtesting

a. Beginning one (1) year after an institution starts to comply with this Appendix, it must conduct backtesting by comparing each of its most recent two hundred fifty (250) business days' actual net trading profit or loss with the corresponding daily VAR measures generated for internal risk measurement purposes and calibrated to a one-day holding period and a 99 percent, one-tailed confidence level.

(Actual net trading profits and losses typically include such things as realized and unrealized gains and losses on portfolio positions as well as fee income and commissions associated with trading activities.)

b. Once each quarter, the institution must identify the number of exceptions that is, the number of business days for which the magnitude of the actual daily net trading loss, if any, exceeds the corresponding daily VAR measures.

c. An institution must use the multiplication factor indicated in Table 1 of this Appendix in determining its capital charge for market risk under Paragraph (C)(1)(b)(1)(b) of this Appendix until it obtains the next quarter's backtesting results, unless the Banking Board determines that a different adjustment or other action is appropriate.

TABLE 1 MULTIPLICATION FACTOR BASED ON RESULTS OF BACKTESTING

E. Specific Risk

1. Specific risk surcharge. For the purposes of this Paragraph (C)(1)(b)(2) of this Appendix,

an institution shall calculate its specific risk surcharge as follows:

a. Internal models that incorporate specific risk.

(1) No specific risk surcharge required for qualifying internal models. An institution that incorporates specific risk in its internal model has no specific risk surcharge for purposes of Paragraph (C)(1)(b)(2) of this Appendix if the institution demonstrates to the Banking Board that its internal model adequately measures all aspects of specific risk, including default and event risk, of covered debt and equity positions. In evaluating an institution's internal model, the Banking Board will take into account the extent to which the internal model:

(a) Explains the historical price variation in the trading portfolio; and

(b) Captures concentrations.

(2) Specific risk surcharge for modeled specific risk that fails to adequately measure default or event risk. An institution that incorporates specific risk in its internal model but fails to demonstrate that its internal model adequately measures all aspects of specific risk, including default and event risk, as provided by Paragraph (E)(1)(a) of this Appendix, must calculate its specific risk surcharge pursuant to one of the following methods:

(a) If the institution's internal model separates the VAR measure into a specific risk portion and a general market risk portion, then the specific risk surcharge equals the previous day's specific risk portion.

(b) If the institution's internal model does not separate the VAR measure into a specific risk portion and a general market risk portion, then the specific risk surcharge equals the sum of the previous day's VAR measure for subportfolios of covered debt and equity positions.

b. Specific risk surcharge for specific risk not modeled. If an institution does not model specific risk pursuant to Paragraph (E)(1)(a) of this Appendix, then the institution shall calculate its specific risk surcharge using the standard specific risk capital charge pursuant to Paragraph (E)(3) of this Appendix.

2. Covered debt and equity position. If a model includes the specific risk of covered debt positions but not covered equity positions (or vice versa), then the institution may reduce its specific risk charge for the included positions under Paragraph (E)(1)(a)(2) of this Appendix. The specific risk charge for the positions not included equals the standard specific risk capital charge under Paragraph (E)(3) of this Appendix.

3. Standard specific risk capital charge. The standard specific risk capital charge equals the sum of the components for covered debt and equity positions as follows:

a. Covered debt positions

(1) For the purposes of Paragraph (E) of this Appendix, covered debt positions means fixed-rate or floating-rate debt instruments located in the trading account and instruments located in the trading account with values that react primarily to changes in interest rates, including certain non-convertible preferred stock, convertible bonds, and instruments subject to repurchase and lending agreements. Also included are derivatives (including written and purchased options) for which the underlying instrument is a covered debt instrument that is subject to a non-zero specific risk capital charge.

(a) For covered debt positions that are derivatives, an institution must risk-weight (as described in Paragraph (E)(3)(a)(3) of this Appendix) the market value of the effective notional amount of the underlying debt instrument or index portfolio. Swaps must be included as the notional position in the underlying debt instrument or index portfolio, with a receiving side treated as a long position and a paying side treated as a short position; and

(b) For covered debt positions that are options, whether long or short, an institution must risk-weight (as described in Paragraph (E)(3)(a)(3) of this Appendix) the market value of the effective notional amount of the underlying debt instrument or index multiplied by the option's delta.

(2) An institution may net long and short covered debt positions (including derivatives) in identical debt issues or indices.

(3) An institution must multiply the absolute value of the current market value of each net long or short covered debt position by the appropriate specific risk weighting factor indicated in Table 2 of this Appendix. The specific risk capital charge component for covered debt positions is the sum of the weighted values.

TABLE 2

SPECIFIC RISK WEIGHTING FACTORS FOR COVERED DEBT POSITIONS

1 The "government" category includes all debt instruments of central governments of OECD countries (as defined in Paragraph (B)(24) of this Rule) including bonds, Treasury bills, and other short-term instruments, as well as local currency instruments of non-OECD central governments to the extent the institution has liabilities booked in that currency.

2 The "qualifying" category includes debt instruments of United States Government-sponsored agencies (as defined in Paragraph (B)(36) of this Rule), general obligation debt instruments issued by states and other political subdivisions of OECD countries, multilateral development banks, and debt instruments issued by United States depository institutions or OECD-banks that do not qualify as capital of the issuing institution. This category also includes other debt instruments, including corporate debt and revenue instruments issued by states and other political subdivisions of OECD countries that are:

a. Rated investment grade by at least two nationally recognized credit rating services;

b. Rated investment grade by one nationally recognized credit rating agency and not rated less than investment-grade by any other credit rating agency; or c. Unrated, but deemed to be of comparable investment quality by the reporting institution and the issuer has instruments listed on a recognized stock exchange, subject to review by the Banking Board.

3 The "other" category includes debt instruments that are not included in the government or qualifying categories.

b. Covered equity positions

(1) For the purposes of this Paragraph (E) of this Appendix, covered equity positions means equity instruments located in the trading account and instruments located in the trading account with values that react primarily to changes in equity prices, including voting or non-voting common stock, certain convertible bonds, and commitments to buy or sell equity instruments. Also included are derivatives (including written and purchased options) for which the underlying is a covered equity position.

(a) For covered equity positions that are derivatives, an institution must risk weight (as described in Paragraph (E)(3)(b)(3) of this Appendix) the market value of the effective notional amount of the underlying equity instrument or equity portfolio. Swaps must be included as the notional position in the underlying equity instrument or index portfolio, with a receiving side treated as a long position and a paying side treated as a short position; and

(b) For covered equity positions that are options, whether long or short, an institution must risk weight (as described in Paragraph (E)(3)(b)(3) of this Appendix) the market value of the effective notional amount of the underlying equity instrument or index multiplied by the option's delta.

(2) An institution may net long and short covered equity positions (including derivatives) in identical equity issues or equity indices in the same market.

(An institution may also net positions in depository receipts against an opposite position in the underlying equity or identical equity in different markets, provided that the institution includes the costs of conversion.)

(3)

(a) An institution must multiply the absolute value of the current market value of each net long or short covered equity position by a risk weighting factor of 8.0 percent, or by 4.0 percent if the equity is held in a portfolio that is both liquid and well-diversified. For covered equity positions that are index contracts comprising a well-diversified portfolio of equity instruments, the net long or short position is multiplied by a risk weighting factor of 2.0 percent.

(A portfolio is liquid and well-diversified if: (1) It is characterized by a limited sensitivity to price changes of any single equity issue or closely related group of equity issues held in the portfolio; (2) The volatility of the portfolio's value is not dominated by the volatility of any individual equity issue or by equity issues from any single industry or economic sector; (3) It contains a large number of individual equity positions, with no single position representing a substantial portion of the portfolio's total market value; and (4) It consists mainly of issues traded on organized exchanges or in well-established over-the-counter markets.)

(b) For covered equity positions from the following futures-related arbitrage strategies, an institution may apply a 2.0 percent risk weighting factor to one side (long or short) of each position with the opposite side exempt from charge:

(i) Long and short positions in exactly the same index at different dates or in different market centers; or

(ii) Long and short positions in index contracts at the same date in different but similar indices.

(c) For futures contracts on broadly-based indices that are matched by offsetting positions in a basket of stocks comprising the index, an institution may apply a 2.0 percent risk weighting factor to the futures and stock basket positions (long and short), provided that such trades are deliberately entered into and separately controlled, and that the basket of stocks comprises at least 90 percent of the capitalization of the index.

(4) The specific risk capital charge component for covered equity positions is the sum of the weighted values.

F. The Banking Board reserves the authority to modify the application of any provisions in this

Appendix to any institution, upon reasonable justification.

TC15 Suspicious Activity Reports [Section 11-109-103, C.R.S.] [Repealed eff. 04/30/2016]

TC16 Insurance [Section 11-109-104(1)(f), C.R.S.]

A. A trust company must, at all times, maintain a surety bond appropriate to the size and scope of the company's business, but in no event in an amount less than $1,000,000. In addition, a trust company must, at all times, maintain a fiduciary errors and omissions insurance policy appropriate to the size and scope of the company's business, but in no event in an amount less than $1,000,000. In determining the amount of the surety bond and errors and omissions insurance, the trust company's board of directors shall give due and careful consideration to known elements and factors constituting risk and hazards for the company.

B. Any surety bond or errors and omissions insurance secured by a trust company shall provide that the bonding company providing the bond(s), in the event of cancellation or nonrenewal of such bond(s), will give at least ninety (90) days notice to the trust company and to the State Bank Commissioner.

TC17 Deposit of Securities [Section 11-109-104(1)(a), C.R.S.]

A. Purpose. The purpose of this Rule is to protect the Division of Banking against any expense it may incur in liquidating a trust company (nondeposit-taking trust company) when the assets of such trust company available to the Division of Banking for this purpose are insufficient.

B. Definitions: For the purpose of this Rule:

1. "Trust company" shall mean a Colorado trust company that is not authorized to accept or hold savings deposits, time deposits or certificates of deposit pursuant to Section 11-109-201(1)(d), C.R.S., of the Colorado Banking Code.

2. "Depository trust company" shall mean a Colorado trust company that is authorized to accept and hold savings deposits, time deposits and certificates of deposit and whose deposits are insured by the Federal Deposit Insurance Corporation.

3. "Eligible Securities" shall mean any investment or security that qualifies as Liquid Capital, as that term is defined in Banking Board Rule TC13.5.

4. "Custodian" shall mean any commercial bank, trust company, depository trust company, or other entity approved by the Division of Banking, other than the trust company, for which the eligible securities are being held, approved by the State Bank Commissioner to hold in custody eligible securities.

C. Deposit of Eligible Securities

1. A trust company shall deposit with one or more custodians eligible securities having a market value of not less than $250,000. Eligible securities, even if commingled with other assets of a trust company, shall be deemed by operation of law to be held in trust for the benefit of the Division of Banking in the event of the involuntary liquidation of a trust company. Upon deposit, a trust company shall notify the Division of Banking in writing of the name, address, and telephone number of each custodian and the identity and value of each of the eligible securities deposited with the custodian(s).

2. The Custodial Agreement between a trust company and a custodian holding the eligible securities shall include the following:

"Upon receiving an Order issued by the Colorado State Banking Board that it is taking possession of and seizing the eligible securities hereunder, the custodian shall immediately surrender title and possession of such eligible securities to the State Bank Commissioner. The custodian(s) shall not be liable for any such relinquishment of the eligible securities undertaken in good faith and upon notice that appears valid on its face."

3. A trust company shall include with each quarterly Report of Condition filed with the Division of Banking a list of the eligible securities on deposit with its custodian(s), together with the market value of the eligible securities as of the end of such quarter.

4. A trust company may, from time to time, substitute other eligible securities for eligible securities on deposit with its custodian(s) provided that:

a. The market value of the substitute eligible securities will, when added to the value of the remaining eligible securities, equal or exceed the amount of the required deposit;

b. The Division of Banking is given not less than seven (7) days prior written notice identifying the eligible securities and the market value of the eligible securities to be withdrawn from the custodian(s), and listing the eligible securities and the market value of the eligible securities to be substituted therefore; and c. A copy of the notice sent to the Division of Banking is sent to the custodian(s).

D. Priority of division of banking.

In the event of the involuntary liquidation of a trust company, as provided in Sections 11-109-702 and 11-109-704, C.R.S., the custodian(s) shall immediately surrender the eligible securities to the Banking Board; and the Division of Banking shall have a first and prior claim against the eligible securities to satisfy the obligations incurred by the Division of Banking in carrying out its duties and responsibilities under Sections 11-109-702 and 11-109-704, C.R.S.

TC18 Investments in Loans [Section 11-109-902(1)(a), C.R.S.]

A. Purpose.

The purpose of this Rule is to permit Colorado trust companies that are insured by the Federal Deposit Insurance Corporation to diversify their investment portfolios by purchasing existing commercial loans or participations in existing commercial loans. It does not authorize Colorado trust companies to originate or make commercial loans, consumer loans, mortgage loans, or any other type of loan or to have a direct borrower-lender relationship with any person or business customer.

B. Definitions

1. An "existing commercial loan" means a direct or indirect loan or extension of credit that was made or initiated by a lender or financial institution, other than a Colorado trust company, to a business customer on the basis of any obligation of that customer to repay the funds, or repayable from specific property pledged by or on behalf of the business customer.

2. A "commercial loan" means a direct or indirect loan from a lender or financial institution to a business customer for the purpose of providing funds needed by that customer's business. The term "commercial loan" does not include bankers' acceptances, loans secured by bills of lading or warehouse receipts covering readily marketable securities, or loans to depository institutions, including but not limited to commercial banks, industrial banks, savings and loan associations, credit unions, or trust companies, or to non-depository trust companies.

3. "Business customer" means a corporation, partnership, joint venture, association, business trust, limited liability company, not-for-profit corporation, or similar entity or organization.

C. Purchase of Existing Commercial Loans.

A trust company may invest in existing commercial loans to the same extent that it could acquire or invest in such loans if it were operating as a national bank, subject to the following limitations and conditions:

1. The trust company's capital ratios fall within the adequately capitalized category with a risk-based capital ratio of at least 8 percent, a Tier 1 capital ratio of at least 5 percent, and a leverage ratio of at least 4 percent. The capital ratios are defined in Banking Board Rule TC13-Minimum Capital Ratios, and Banking Board Rule TC14-Risk-Based Capital Definitions and Adequacy.

2. The aggregate of existing commercial loans shall not exceed 50 percent of the trust company's assets.

3. Except where an existing loan is in default, an existing commercial loan shall be maintained and serviced by the originator of the loan or someone acting on behalf of the originator and not by the trust company.

4. Existing commercial loans do not exceed the lending limits contained in this Rule.

5. For all investments in existing commercial loans, a reserve for loan losses shall be established in accordance with the requirements applicable to state chartered commercial banks.

6. Before investing in existing commercial loans, a trust company shall amend its investment policy to include the guidelines and procedures to be utilized by the trust company in acquiring and monitoring such credits.

7. Before investing in existing commercial loans, a trust company shall have an officer qualified by character and experience consistent with the responsibilities and duties relating to investments in commercial loans.

8. A written lending policy, approved by the directors of the trust company, shall provide a foundation for sound portfolio management.

9. Investing in existing commercial loans shall be supervised by the board of directors of the trust company or a committee thereof.

10. The purchase of existing commercial loans from an affiliate shall be subject to the provisions of Sections 23A and 23B of the Federal Reserve Act.

D. Participations.

A trust company may purchase a participation in a loan that qualifies as an existing commercial loan provided that such participation comes within the limitations and conditions set forth in the proceeding Paragraph.

E. Lending Limits.

An existing commercial loan representing obligations of the same obligor or business customer shall not exceed 15 percent of the trust company's total capital.

1. Combining Existing Commercial Loans to Separate Borrowers

a. General Rule

Existing commercial loans to one person will be attributed to other persons, for the purpose of this Rule, when: (1) the proceeds of such loans or extensions of credit are to be used for the direct benefit of the other person or persons; or (2) a common enterprise is deemed to exist between the persons.

b. Common Enterprise

(1) Whether two or more persons are engaged in a common enterprise will depend upon a realistic evaluation of the facts and circumstances of the particular transaction.

(2) Where the expected source of repayment for each existing commercial loan is the same for each person, a common enterprise will be deemed to exist and such loans or extensions of credit must be combined.

(3) Where existing commercial loans are made to persons who are related through common control, including where one person is controlled by another person, a common enterprise will be deemed to exist if the persons are engaged in interdependent businesses or there is a substantial financial interdependence among them. A common enterprise will be deemed to exist when 50 percent or more of one person's gross receipts or gross expenditures, on an annual basis, are derived from transactions with one or more persons related through common control, as defined in this Paragraph of this Rule. Gross receipts and expenditures include gross revenues/expenses, intercompany loans, dividends, capital contributions, and similar receipts or payments.

(4) A common enterprise will also be deemed to exist when separate persons borrow from the lender for the purpose of acquiring a business enterprise of which those persons will own more than 50 percent of the voting securities.

(5) For the purpose of this Rule, control shall be presumed to exist when:

(a) One or more persons acting in concert directly or indirectly own, control, or have power to vote 25 percent of more of any class of voting securities of another person; or

(b) One or more persons acting in concert control, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person; or

(c) Any other circumstances exist that indicate that one or more persons acting in concert directly or indirectly exercise a controlling influence over the management or policies of another person.

c. Loans to Corporations

(1) For the purpose of this Rule, a corporation is a subsidiary of any person that owns or beneficially owns more than 50 percent of the voting stock of the corporation. Such ownership need not be direct. Thus, if Corporation A owns more than 50 percent of the voting stock of Corporation X which, in turn, owns more than 50 percent of the voting stock of Corporation Y, Corporation Y would be considered a subsidiary of both Corporation A and of Corporation X. For the purpose of this Rule, corporation includes a limited liability company organized under the laws of certain states.

(2) Existing commercial loans to a person and its subsidiary or to subsidiaries of one person need not be combined where the trust company has determined that the person and subsidiaries involved are not engaged in a common enterprise as that term is defined in this Rule.

(3) Notwithstanding Paragraph (E)(1)(c)(2) of this Rule, existing commercial loans to a corporate group may not exceed 50 percent of the trust company's total capital. This aggregate limitation applies only to existing commercial loans made pursuant to Paragraphs (E)(1)(b) and (c) of this Rule. A corporate group includes a person and all of its subsidiaries.

d. Loans to Partnerships, Joint Ventures, and Associations

(1) Existing commercial loans to a partnership, joint venture, or association shall, for the purpose of this Rule, be considered loans or extensions of credit to each member of such partnership, joint venture, or association.

(2) Existing commercial loans to members of a partnership, joint venture, or association shall, for the purpose of this rule, be attributed to the partnership, joint venture, or association where one or more of the tests set forth in Paragraph (E)(1)(a) of this Rule is satisfied with respect to one or more such members. However, loans to members of a partnership, joint venture, or association will not be attributed to other members of the partnership, joint venture, or association under this section of this Rule unless one or more of the tests set forth in Paragraph (E)(1)(a) of this Rule is satisfied with respect to such other members. The tests set forth in Paragraph (E)(1)(a) of this Rule shall be deemed to be satisfied when existing commercial loans are made to members of a partnership, joint venture, or association for the purpose of purchasing an interest in such partnership, joint venture, or association.

(3) The Rule set forth in Paragraph (E)(1)(d)(1) of this Rule is not applicable to limited partners in limited partnerships or to members of joint ventures or associations if such partners or members, by terms of the partnership or membership agreement, are not to be held liable for the debts or actions of the partnership, joint venture, or association. However, the Rules set forth in Paragraph (E)(1) of this Rule are applicable to such partners or members.

2. Exceptions to the Lending Limits

a. Discount of Commercial Business Paper

(1) Existing commercial loans arising from the discount of commercial or business paper evidencing an obligation to the person negotiating it with recourse shall not be subject to any limitation based on capital.

(2) This exception applies to negotiable paper given in payment of the purchase price of commodities in domestic or export transactions purchased for resale or to be used in connection with the fabrication of a product, or to be used for any other business purpose that may reasonably be expected to provide funds for payment of the paper. Existing commercial loans arising from the discount of paper of the kind described in this Paragraph must bear the full recourse endorsement of the owner. However, existing commercial loans arising from the discount of such paper in export transactions may be endorsed by such owner without recourse or with limited recourse, or may be accompanied by a separate agreement for limited recourse; provided, that if transferred without full recourse, the paper must be supported by an assignment of appropriate insurance covering the political, credit, and transfer risks applicable to the paper. Insurance provided by the Export-Import Bank or the Foreign Credit Insurance Association is considered appropriate for this purpose. Existing commercial loans based on this exception are not subject to any limitation.

(3) Since the reason for the unlimited credit under this exception is that the paper arises from the sale of a commodity that may reasonably be expected to provide funds for payment of the paper, failure to pay either principal or interest when due removes the reason for unlimited credit. Therefore, although the line of credit to the maker or endorser should not be classified as excessive by reason of such default, the paper on which the default has occurred must thereafter be taken into consideration in determining whether additional existing commercial loans may be acquired within the limits of this Rule. The same principles of disqualification from the exception applies to any renewal or extension of either the entire loan or an installment thereof.

b. Loans Secured by U.S. Obligations

(1) Existing commercial loans secured by bonds, notes, certificates of indebtedness, or Treasury bills of the United States or by other such obligations fully guaranteed as to principal and interest by the United States shall not be subject to any limitation based on capital.

(2) This exception applies only to the extent that existing commercial loans are fully secured by the current market value of obligations of the United States or guaranteed by the United States.

(3) If the market value of the collateral declines to the extent that the existing commercial loan is no longer in conformance with this exception and exceeds the general 15 percent limitation, the existing commercial loan must be brought into conformance within five (5) business days.

c. Loans to or Guaranteed by a Federal Agency

(1) Existing commercial loans to or secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission, or establishment of the United States or any corporation wholly owned directly or indirectly by the United States shall not be subject to any limitation based on capital.

(2) This exception may apply to only that portion of the existing commercial loan that is covered by a federal guarantee or commitment.

(3) For purposes of this exception, the commitment or guarantee must be payable in cash or its equivalent within sixty (60) days after demand for payment is made.

(4) A guarantee or commitment is unconditional if the protection afforded the lender is not substantially diminished or impaired in the case of loss resulting from factors beyond the lender's control. Protection against loss is not materially diminished or impaired by procedural requirements, such as an agreement to take over only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specified period after its occurrence, or a requirement of good faith on the part of the lender.

d. Loans Secured by Segregated Deposit Accounts

(1) Existing commercial loans secured by a segregated deposit account by the lender shall not be subject to any limitation based on capital.

(2) The trust company must ensure that a security interest has been perfected by the lender in the deposit, including the assignment of a specifically identified deposit and any other actions required by state law.

(3) Deposit accounts that may qualify for this exception include deposits in any form generally recognized as deposits. In the case of a deposit eligible for withdrawal prior to the maturity of the secured loan, the trust company must ensure that the lender has established internal procedures that will prevent the release of the security.

(4) A deposit that is denominated and payable in a currency other than that of the existing commercial loan that it secures may be eligible for this exception if it is freely convertible to U.S. dollars. The trust company must ensure that the lender revalues the deposit at least monthly, using appropriate foreign exchange rates, to ensure that the existing commercial loan remains fully secured. This exception applies to only that portion of the loan or extension of credit that is covered by the U.S. dollar value of the deposit. If the U.S. dollar value of the deposit falls to the extent that the existing commercial loan is in nonconformance with this exception and exceeds the general 15 percent limitation, the trust company must ensure that the loan is brought into conformance by the lender within five (5) business days, except where judicial proceedings, regulatory actions, or other extraordinary occurrences prevent the lender from taking such action. This exception is not authority for lenders to take deposits denominated in foreign currencies.

3. Loans Charged Off in Whole or in Part

The lending limits apply to all existing existing commercial loans purchased by the trust company, including such loans that have been charged off on the books of the trust company in whole or in part. Existing commercial loans that have become unenforceable by reason of discharge in bankruptcy or are no longer legally enforceable for other reasons, are not existing commercial loans for purposes of this Rule.

4. Approval by Banking Board

Upon application by a trust company to the Banking Board, the Banking Board may allow a trust company to exceed the "lending limits" to purchase a specific existing commercial loan if the trust company proves that such loan will not adversely impact the safe and sound operations of the trust company and the protection of customers of the trust company. In making its decision, the Banking Board shall consider the quality of the existing commercial loans.

The Banking Board shall also have the authority to determine when an existing commercial loan putatively made to a person shall, for the purpose of this Paragraph, be attributed to another person.

TC19 Investment in a Subsidiary [Section 11-109-902(5), C.R.S.]

A. General Limitations

A trust company may invest in a subsidiary corporation or limited liability company (LLC) that engages in activities in which the parent trust company may engage, subject to the same limitations the parent trust company would be subject to if it were engaged in the activity, provided that the parent trust company holds at least an 80 percent ownership interest in the subsidiary corporation or LLC.

B. Additional Limitations

The subsidiary of a trust company may invest in a subsidiary corporation or LLC at less than an 80 percent ownership level provided that each of the following conditions are met:

1. The activities of the subsidiary corporation or LLC in which the investment is made are limited to activities that are part of, or incidental to, the trust company business;

2. The trust company is able to prevent the subsidiary corporation or LLC from engaging in activities that do not meet the foregoing standard;

3. The trust company's loss exposure is limited, as both a legal and accounting matter, and the trust company does not have open-ended liability for the obligations of the subsidiary corporation or LLC; and

4. The investment is convenient or useful to the trust company in carrying out its business and not a mere passive investment unrelated to the trust company's business.

TC20 Reports of Condition and Income (Call Report) Filing Requirements [Section 11-109-402(4)(a), C.R.S.]

A. Depository Trust Company Requirements [Emergency rule expired 07/29/2020]

B. Non-Depository Trust Company Requirements

Non-depository trust companies must file quarterly Reports of Condition and Income (Call Reports) directly with the Colorado Division of Banking in paper form.

TC21 Fiduciary Self-Dealing [Section 11-109-103, C.R.S.]

A. Unless lawfully authorized by the instrument creating the relationship, by court order or by Colorado law, funds held by a trust company as fiduciary shall not be invested in stock or obligations of, or property acquired from, the trust company or its directors, officers or employees of such affiliates. If the retention of stock or obligations of the trust company or its affiliates is authorized by the instrument creating the relationship, by a court order or by Colorado law, a trust company as fiduciary may exercise rights to purchase its own stock or securities convertible into its own stock when offered pro rate to stockholders. When the exercise of rights or receipt of the stock dividend results in fractional shareholding, additional fractional shares may be purchased to compliment the fractional shares acquired.

B. A trust company may sell assets held by it as fiduciary in one account if the transaction is fair to both accounts and if such transaction is not prohibited by the terms of the governing instrument.

C. A trust company may deposit funds of the estate or trust account as time or demand deposits in its own banking department and may borrow money on behalf of the fiduciary account from itself and may pledge or encumber estate or trust assets as security for such loan, provided such transactions are fair to the fiduciary account.

TC22 Establishment of a Colorado Office Location by a Trust Company Chartered in Another State [Section 11-109-202, C.R.S., et. seq.]

A. Definitions

For the purposes of this Rule

1. "Home state" means the state where the trust company is chartered.

2. "Home state supervisor" means the state supervisory agency with primary responsibility for chartering and supervising the trust company.

3. "Out-of-state trust company" shall mean any trust company chartered under the laws of another state and domiciled in that state.

4. "Representative trust office" shall have the same meaning as defined at Section 11-109-101(6), C.R.S.

5. "Trust business" shall have the same meaning as defined at Section 11-109-101(10), C.R.S.

6. "Trust office" shall have the same meaning as defined at Section 11-109-101(13), C.R.S.

B. Establishment of a Representative Trust Office

1. The Banking Board shall issue a certificate of authority to an out-of-state trust company to establish a representative trust office in Colorado upon finding that:

a. The out-of-state trust company is lawfully chartered and operating in good standing in the home state;

b. The out-of-state trust company has the authority to operate a representative office outside of its home state and the establishment of such office has been approved by the applicant's board of directors;

c. A trust company chartered by, and in good standing with, the Colorado Division of Banking would be allowed by the applicant's home state supervisor to establish a representative trust office under similar terms and conditions in the applicant's home state;

d. The applicant's home state supervisor has entered into a cooperative regulatory and information sharing agreement with the Division of Banking, and/or has entered into the Conference of State Bank Supervisors Nationwide Cooperative Agreement for the Supervision of Multi-State Trust Institutions;

e. The name that the representative trust office is to be operated under is not the same, or deceptively similar to that of an existing Colorado bank, trust company, or industrial bank; and,

f. The applicant has certified that a trust business will not be conducted at the representative office.

C. Establishment of a Trust Office

1. The Banking Board shall issue a certificate of authority to an out-of-state trust company to establish a trust office and conduct a trust business in Colorado upon finding that:

a. The out-of-state trust company is lawfully chartered and operating in good standing in the home state;

b. The out-of-state trust company has the authority to operate a trust office outside of its home state and the establishment of such office has been approved by the applicant's board of directors;

c. A trust company chartered by, and in good standing with, the Colorado Division of Banking would be allowed by the applicant's home state supervisor to establish a trust office under similar terms and conditions in the applicant's home state;

d. The applicant's home state supervisor has entered into a cooperative regulatory and information sharing agreement with the Division of Banking, and/or has entered into the Conference of State Bank Supervisors Nationwide Cooperative Agreement for the Supervision of Multi-State Trust Institutions;

e. The name that the trust office is to be operated under is not the same, or deceptively similar to that of an existing Colorado bank, trust company, or industrial bank;

f. If the applicant proposes to accept deposits, such deposits are insured by the Federal Deposit Insurance Corporation; and,

g. The applicant maintains capital at or above the minimum standards as set forth in Banking Board Rule TC13 for depository trust companies, or Banking Board Rule TC13.5 for nondepository trust companies.

(1) An applicant may satisfy the minimum capital requirement by depositing eligible securities in accordance with the requirements of Banking Board Rule TC17 in an amount, when combined with the applicant's equity capital, sufficient to meet the required minimum capital levels.

D. Certificate of Authority

Before a certificate of authority is issued for a representative trust office or trust office, and annually thereafter on or before January 1 of each succeeding year, the out-of-state trust company shall pay to the Colorado Division of Banking a fee in an amount as set by the Banking Board and published in accordance with Banking Board Rule TC4. Each certificate of authority shall expire on January 1 unless the annual fee for the year has been paid prior to such date and the out-of-state trust company certifies in writing that it is, and shall remain, in compliance with the conditions of Paragraph (B) or (C) of this Rule, as applicable.

E. Termination of Certificate of Authority

The Commissioner may, upon ten (10) days notice, terminate a certificate of authority if it is determined that the out-of-state trust company is not in compliance with the conditions of Paragraph (B) or (C) of this Rule, as applicable. Within ten (10) days following receipt of the termination notice, the out-of-state trust company may file an application with the Banking Board for hearing to rescind the Commissioner's determination.

TC23 Application Procedures for Private Family Trust Company Charter [Section 11-109-1003, C.R.S.] [Repealed eff. 11/14/2013]

TC24 Private Family Trust Company Exemptions [Section 11-109-1003(1), C.R.S.] [Repealed eff. 11/14/2013]

TC25 Revocation of Exemption [Section 11-109-1006, C.R.S.] [Repealed eff. 11/14/2013]

TC26 Conversion of a Private Family Trust Company to a Public Trust Company [Section 11-109-1007, C.R.S.] [Repealed eff. 11/14/2013]

TC27 Change of Control of a Private Family Trust Company [Section 11-109-1007, C.R.S.] [Repealed eff. 11/14/2013]