[Federal Register Volume 71, Number 35 (Wednesday, February 22, 2006)]
[Rules and Regulations]
[Pages 8932-8938]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1533]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 06-02]
RIN 1557-AC90

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulation H and Y; Docket No. R-1087]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC46


Risk-Based Capital Guidelines; Market Risk Measure; Securities 
Borrowing Transactions

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; and Federal Deposit Insurance 
Corporation.

ACTION: Final rule.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (Board), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the Agencies) are 
issuing a final rule that amends their market risk rules to revise the 
risk-based capital treatment for cash collateral that is posted in 
connection with securities borrowing transactions. This final rule will 
make permanent, and expand the scope of, an interim final rule issued 
in 2000 (the interim rule) that reduced the capital requirement for 
certain cash-collateralized securities borrowing transactions of banks 
and bank holding companies (banking organizations) that have adopted 
the market risk rule. This action more appropriately aligns the capital 
requirements for these transactions with the risk involved and provides 
a capital treatment for U.S. banking organizations that is more in line 
with the capital treatment to which their domestic and foreign 
competitors are subject.

DATES: Effective: February 22, 2006.

FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert, 
Capital Policy (202) 874-6022, or Carl Kaminski, Attorney, Legislative 
and Regulatory Activities Division (202) 874-5090, Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

[[Page 8933]]

    Board: Norah Barger, Associate Director, Division of Banking 
Supervision and Regulation, (202) 452-2402, David Adkins, Supervisory 
Financial Analyst, Division of Banking Supervision and Regulation, 
(202) 452-5259, Juan C. Climent, Supervisory Financial Analyst, 
Division of Banking Supervision and Regulation, (202) 872-7526, or Mark 
Van Der Weide, Senior Counsel, Legal Division, (202) 452-2263. For the 
hearing impaired only, Telecommunication Device for the Deaf (TDD), 
(202) 263-4869.
    FDIC: Jason Cave, Associate Director, Division of Supervision and 
Consumer Protection, (202) 898-3548, John Feid, Senior Capital Markets 
Specialist, Division of Supervision and Consumer Protection, (202) 898-
8649, or Michael B. Phillips, Counsel, (202) 898-3581, Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Neither the July 1988 agreement entitled ``International 
Convergence of Capital Measurement and Capital Standards'' (Basel 
Accord) nor the risk-based capital guidelines adopted by the Agencies 
in 1989 (the 1989 rules) specifically address securities borrowing 
transactions.\1\ At that time, the involvement of U.S. banking 
organizations in corporate debt and equity securities trading 
activities was limited. However, in recent years, U.S. banking 
organizations have been authorized to engage in, and have engaged in, 
trading activities to a significantly greater extent. Securities 
borrowing transactions serve an important function in the operation of 
securities markets. They are used in conjunction with short sales, 
securities fails (securities sold but not made available for delivery 
on the settlement date), and option and arbitrage positions. Securities 
are also borrowed in order to be pledged against public fund deposits. 
Securities borrowing enhances market efficiency and provides an 
important source of liquidity to the securities markets.
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    \1\ The Basel Accord was developed by the Basel Committee on 
Banking Supervision and endorsed by the central bank governors of 
the Group of Ten (G-10) countries. The Basel Accord provides a 
framework for assessing the capital adequacy of a depository 
institution by risk weighting its assets and off-balance sheet 
exposures primarily based on credit risk. The Basel Committee on 
Banking Supervision consists of representatives of the supervisory 
authorities and central banks from the Group of Ten countries 
(Belgium, Canada, France, Germany, Italy, Japan, Netherlands, 
Sweden, Switzerland, United Kingdom, United States) and Luxembourg. 
See 54 FR 4168 (January 27, 1989) (OCC), 54 FR 4186 (January 27, 
1989) (Board), 54 FR 11509 (March 21, 1989) (FDIC).
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    In a typical securities borrowing transaction, a party (for 
example, a banking organization) borrows securities from a securities 
lender and posts collateral in the form of cash or highly marketable 
securities with the securities lender (or an agent acting on behalf of 
the securities lender) in an amount that fully covers the value of the 
securities borrowed plus an additional margin, usually ranging from two 
to five percent. In accordance with U.S. generally accepted accounting 
principles (GAAP), cash collateral posted with the securities lender is 
treated as a receivable on the books of the securities borrower (that 
is, it is treated as a cash loan from the securities borrower to the 
securities lender). Under the 1989 rules, the securities borrower is 
required to hold capital against the full amount of this receivable--
that is, the amount of the collateral posted. In contrast, under the 
1989 rules, where a securities borrower posts collateral in the form of 
securities and those securities continue to be carried on the 
borrower's books, it does not incur a capital charge on the posting of 
the securities as collateral because under GAAP no receivable from the 
counterparty is booked on the balance sheet.

II. Interim Final Rule

    In December 2000, the Agencies issued the interim rule with request 
for comment addressing the risk-based capital treatment of securities 
borrowing transactions where the borrower posts cash collateral.\2\ In 
developing the interim rule, the Agencies recognized that securities 
borrowing is a long-established financial activity that historically 
has resulted in an exceedingly low level of losses. Accordingly, the 
application of a standard 100 percent risk weight to the full amount of 
the cash collateral posted to support such borrowings resulted in a 
capital charge that was excessively high, not only in light of the risk 
involved in the transactions, but also in comparison to the capital 
required by other U.S. and non-U.S. regulators of financial firms for 
the same transactions. The Agencies also noted that, under the 1989 
rules, a banking organization incurred no capital charge when it 
borrowed securities and posted securities to collateralize the 
borrowing, even though the organization was at risk for the amount by 
which the collateral posted exceeded the value of the securities 
borrowed. As a result, securities borrowing transactions in which cash 
collateral was used were penalized relative to those where securities 
were used as collateral.
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    \2\ See 65 FR 75856 (December 5, 2000), 12 CFR part 3, appendix 
B (OCC), 12 CFR part 208, appendix A, 12 CFR part 225, appendix A 
(Board), 12 CFR part 325, appendix C (FDIC).
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    To address the case where securities borrowing transactions are 
collateralized by cash, the Agencies issued the interim rule with a 
request for comment that would better reflect the low risk of such 
transactions. The interim rule applied only to banking organizations 
that had adopted the market risk rule because only banking 
organizations with significant trading activity tend to engage in 
securities borrowing in any volume. Banking organizations that had not 
adopted the market risk rule continued to be subject to the risk-based 
capital treatment set forth in the 1989 rules for all their securities 
borrowing transactions.
    Under the interim rule, banking organizations that have adopted the 
market risk rule for assessing capital adequacy for trading positions 
could exclude from risk-weighted assets receivables arising from the 
posting of cash collateral associated with securities borrowing 
transactions to the extent such receivables were collateralized by the 
market value of the securities borrowed, subject to all of the 
following conditions:
    1. The transaction is based on securities includable in the trading 
book that are liquid and readily marketable;
    2. The transaction is marked to market daily;
    3. The transaction is subject to daily margin maintenance 
requirements; and
    4. The transaction is a securities contract under section 555 of 
the Bankruptcy Code (11 U.S.C. 555), a qualified financial contract 
under section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(e)(8)), or a netting contract between or among financial 
institutions under sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231).
    Under this treatment, the amount of the receivable created in 
connection with the posting of cash collateral in a securities 
borrowing transaction that is excluded from the securities borrower's 
adjusted risk-weighted assets is limited to the portion that is 
collateralized by the market value of the securities borrowed. The 
uncollateralized portion, which equals the difference between the 
amount of cash collateral that the securities borrower posts in support 
of the borrowing and the current market

[[Page 8934]]

value of the securities borrowed, is assigned to the risk weight 
appropriate to the securities lender.
    The interim rule did not change the risk-based capital treatment 
for the posting of securities collateral, as opposed to cash 
collateral. However, the Agencies indicated that pending revisions to 
the Basel Accord could require a charge for such borrowing transactions 
and, accordingly, the U.S. risk-based capital treatment could change in 
the future.

Comments Received

    The Agencies received comment letters from eight respondents. The 
commenters uniformly supported the interim rule. With regard to the 
issue of whether the interim rule should be limited to only those 
banking organizations that have implemented the market risk rules, the 
three commenters who addressed this issue expressed support for the 
extension of the interim rule to all banking organizations. On the 
issue of whether the interim rule should be amended to impose a capital 
charge on securities-collateralized borrowing transactions, the 
Agencies received five comments. Views on this issue were mixed as 
three commenters did not support a capital charge, while two expressed 
mild support. Another commenter suggested eliminating the requirement 
that the transaction be a securities contract under the Bankruptcy 
Code, a qualified financial contract under the Federal Deposit 
Insurance Act (FDIA), or a netting contract under the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (FDICIA) or the Board's 
Regulation EE. The commenter suggested that a banking organization 
should be permitted to exclude securities borrowing receivables for 
risk-based capital purposes as long as the pledge of the borrowed 
securities is legally enforceable in the event the counterparty failed.
    On November 17, 2005, the Federal Reserve Board hosted a meeting 
for all institutions subject to the market risk rule to discuss 
finalizing the interim rule. The meeting, which representatives of the 
OCC and the FDIC also attended, allowed all parties subject to the 
interim rule to discuss their positions with respect to how to finalize 
the interim rule on securities borrowing. The Agencies made clear that 
they were not seeking a group opinion or consensus, but rather seeking 
advice from the participants on an individual basis to better 
understand some of the issues. Most meeting participants expressed the 
view that it was important to finalize the interim rule in a way that 
grants capital relief to securities borrowing transactions in line with 
the spirit of the interim rule.
    At the meeting, various banking organizations noted that while the 
first three criteria of the interim rule were appropriate for 
securities borrowing transactions to qualify for the capital treatment 
under the interim rule, the fourth criterion presented challenges. 
Various banking organizations also indicated that a strict reading of 
the fourth criterion would prevent transactions with counterparties 
that are not subject to the U.S. Bankruptcy Code, the FDIA, or FDICIA 
from qualifying for that treatment. In particular, transactions with 
non-U.S. counterparties may not meet the interim rule's fourth 
criterion. Uncertainty also exists with regard to transactions with 
counterparties that are subject to state insolvency regimes or, like 
pension funds, that are not subject to a statutory insolvency regime.
    Several participants stated that an important risk mitigant in 
securities borrowing transactions is that they typically are conducted 
on either an overnight or an open basis, which gives both 
counterparties the right to effectively close out at any time. This 
feature ensures that the banking organization has the ability to 
terminate the transactions early should the banking organization detect 
counterparty credit risk problems, effectively reducing counterparty 
credit risk to very low levels. Because an open or overnight 
transaction allows a banking organization to terminate promptly 
transactions with counterparties whose financial condition is 
deteriorating, events of default such as failure to post margin are 
very seldom encountered. Many institutions present at the meeting 
indicated that, in large part because of the ability to terminate 
transactions at will, defaults on securities borrowing transactions 
have been extremely rare, and defaults resulting in losses have been 
even rarer. Following this meeting, several banking organizations 
submitted detailed technical suggestions on how to amend the interim 
rule to deal with their concerns.

III. Final Rule

    After consideration of the comments received, the Agencies are 
issuing a final rule (the final rule) identical to the interim rule 
with one exception. Specifically, the fourth criterion, which requires 
that a cash-collateralized securities borrowing transaction be a 
securities contract for purposes of the Bankruptcy Code, a qualified 
financial contract for purposes of the FDIA, or a netting contract for 
purposes of FDICIA or Regulation EE, will be replaced with the 
following:
    4.(A) The transaction is a securities contract for the purposes of 
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified 
financial contract for the purposes of section 11(e)(8) of the Federal 
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract 
between or among financial institutions for the purposes of sections 
401-407 of the Federal Deposit Insurance Corporation Improvement Act of 
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR Part 
231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph 4. (A) of this section, then either:
    (i) The banking organization has conducted sufficient legal review 
to reach a well-founded conclusion that (1) the securities borrowing 
agreement executed in connection with the transaction provides the 
banking organization the right to accelerate, terminate, and close-out 
on a net basis all transactions under the agreement and to liquidate or 
set off collateral promptly upon an event of counterparty default, 
including in a bankruptcy, insolvency, or other similar proceeding of 
the counterparty and (2) under applicable law of the relevant 
jurisdiction, its rights under the agreement are legal, valid, binding, 
and enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (ii) The transaction is either overnight or unconditionally 
cancelable at any time by the banking organization, and the banking 
organization has conducted sufficient legal review to reach a well-
founded conclusion that (1) the securities borrowing agreement executed 
in connection with the transaction provides the banking organization 
the right to accelerate, terminate, and close-out on a net basis all 
transactions under the agreement and to liquidate or set off collateral 
promptly upon an event of counterparty default and (2) under the law 
governing the agreement, its rights under the agreement are legal, 
valid, binding, and enforceable.
    The fourth criterion has been revised to broaden the types of 
securities borrowing transactions that qualify for the interim rule. 
Subpart (A) preserves the existing method of qualification. It is the 
responsibility of the banking organization to determine if the 
transaction meets the criteria of subpart (A). If the transaction does 
not meet the criteria under subpart (A), or if there is uncertainty 
about it, the banking organization can rely on the criteria of

[[Page 8935]]

subpart (B) to apply the capital treatment set forth in this final 
rule. Subpart (B) extends the treatment set forth in the interim rule 
to transactions that are exempt from any automatic stay in bankruptcy, 
insolvency, or similar proceedings or that are conducted on a basis 
that is either overnight or that provides the banking organization the 
unconditional right to terminate that transaction at will. In this 
regard, the Agencies will not view a reasonably short notice period, 
typically no more than the standard settlement period associated with 
the securities borrowed, as detracting from the unconditionality of the 
banking organization's termination rights. With regard to overnight 
transactions, the counterparty generally should have no expectation, 
either explicit or implicit, that the banking organization will 
automatically roll over the transaction.
    Under subpart (B), transactions may qualify only if the banking 
organization has conducted sufficient legal review to conclude that its 
rights under the agreement under which the transactions are executed is 
legal, valid, binding, and enforceable. No such review is required for 
transactions qualifying under subpart (A). For transactions executed 
under standard industry contracts, trade groups representing the 
financial services industry with established expertise often commission 
and maintain a library of current legal opinions with respect to the 
legal status, validity, binding effect, and enforceability of such 
contracts with various counterparties under the laws of a number of 
jurisdictions. While the Agencies do not discourage a banking 
organization from obtaining a specific legal opinion tailored to a 
particular transaction, a banking organization's review of the legal 
opinions described above to determine the legal status, validity, 
binding effect, and enforceability of a particular contract with a 
specific counterparty, for example, generally would meet the 
requirement for sufficient legal review under subpart (B).
    The Agencies believe that the revisions to the fourth criterion set 
forth in the final rule resolve, in a manner that preserves safety and 
soundness, technical difficulties banking organizations may have had in 
meeting this criterion for a number of securities borrowing 
transactions.
    At this time, the Agencies have decided not to extend the final 
rule beyond those banking organizations subject to the market risk 
rules. In general, securities borrowings are used to support trading 
activities and, thus, typically only banking organizations subject to 
the market risk rules could realize a more than de minimis benefit from 
the capital treatment set out in this final rule. With regard to the 
issue of assessing a capital charge on securities-collateralized 
securities borrowing transactions, the Agencies believe that while 
imposing such a charge would provide for a more consistent risk-based 
treatment of securities borrowing transactions in general, the enhanced 
consistency would impose additional burden on the affected banking 
organization with only a minimal increase in risk-based capital 
requirements. Accordingly, the Agencies will take no action on this 
issue at this time.
    The Agencies note that the treatment set forth in the final rule 
for securities borrowing differs from, and could result in lower 
capital charges than, the treatment set forth in the Basel II 
framework. The U.S. implementation of that framework could result in a 
capital treatment that differs significantly from that set forth in the 
final rule.

Effective Date

    This final rule is effective as of February 22, 2006. Pursuant to 5 
U.S.C. 553, each of the Agencies may issue a rule without delaying its 
effectiveness if the agency finds good cause for the immediate 
effective date.
    For the following reasons, the Agencies find good cause to issue 
this rule without a delayed effective date. First, in all respects, 
except one, the final rule is identical to the interim final rule that 
has been in effect since 2000. Thus, banking institutions are already 
subject to similar requirements. Second, the new provision in the final 
rule broadens the types of securities transactions that qualify for the 
risk-based capital treatment provided in the interim rule. The final 
rule thus relieves a restriction on U.S. banking organizations and 
fosters consistency among international institutions consistent with 
safety and soundness. Elimination of the costs and burdens associated 
with the restriction that is being removed warrants making this rule 
effective without a delayed effective date.
    Subject to certain exceptions, 12 U.S.C. 4802(b)(1) provides that 
new regulations and amendments to regulations prescribed by a Federal 
banking agency that impose additional reporting, disclosure, or other 
new requirements on an insured depository institution must 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. Like the interim 
rule, the final rule imposes no additional reporting, disclosure, or 
other new requirements on insured depository institutions. Instead, it 
relieves a restriction. For this reason, section 4802(b)(1) does not 
apply to this rulemaking. Alternatively, section 4802(b)(1)(A) provides 
that the Agencies may, upon finding good cause to do so, determine that 
a regulation should become effective without a delayed effective date. 
As noted in the previous paragraph, the Agencies find good cause to 
issue this rule without a delayed effective date.

Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Agencies have determined that this final rule would not have a 
significant impact on a substantial number of small entities in accord 
with the spirit and purposes of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.). The final rule is only applicable to banking 
organizations subject to the market risk rules, which typically apply 
to large banking organizations with significant trading operations. 
Therefore, the Agencies do not believe this final rule will likely have 
a significant impact on a substantial number of small entities. 
Moreover, the overall impact of this final rule is to reduce regulatory 
burden. Accordingly, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    The Agencies have determined that this final rule does not involve 
a collection of information pursuant to the provisions of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

OCC Executive Order 12866

    This rule will apply only to the small number of banks that are 
subject to the market risk rules. For those banks, the rule more 
accurately aligns the risk-based capital charge with the low risk of 
securities borrowing transactions, illustrated by a long-established 
history of exceedingly low levels of losses. Also, the rule will make 
the capital treatment comparable to that of other U.S. and non-U.S. 
regulators of financial firms for the same transactions. The OCC has 
determined that this joint final rule is not a significant regulatory 
action under Executive Order 12866.

OCC Unfunded Mandates Reform Act of 1995 Determinations

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act) requires that an agency prepare a 
budgetary impact statement before

[[Page 8936]]

promulgating a rule that includes a Federal mandate that may result in 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more in any one year. If a 
budgetary impact statement is required, section 205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. As discussed in the preamble, this final rule is limited to banks 
subject to the market risk rules and to securities borrowing 
transactions collateralized with cash. The OCC, therefore, has 
determined that the final rule will not result in expenditures by 
State, local, or tribal governments, or by the private sector of $100 
million or more. Accordingly, the OCC has not prepared a budgetary 
impact statement or specifically addressed the regulatory alternatives 
considered.

OCC Executive Order 13132

    The OCC has determined that this rule does not have any Federalism 
implications, as required by Executive Order 13132, because it would 
not have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distribution 
of power and responsibilities among the various levels of government.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Confidential business 
information, Crime, Currency, Federal Reserve System, Mortgages, 
Reporting and recordkeeping requirements, Securities.

12 CFR Part 225

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

12 CFR Part 325

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

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter 1

Authority and Issuance

0
The interim final rule amending 12 CFR part 3 Appendices A and B, 
published at 65 FR 75856 (December 5, 2000), is adopted as final, with 
the following changes:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

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

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 1835, 3907 and 3909.


0
2. In appendix B to part 3, in section 3, revise paragraph (a)(1) to 
read as follows:

Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk 
Adjustment

Section 3. Adjustments to the Risk-Based Capital Ratio 
Calculations.

    (a) * * *
    (1) Adjusted risk-weighted assets. (i) Covered positions. 
Calculate adjusted risk-weighted assets, which equal risk-weighted 
assets (as determined in accordance with appendix A of this part), 
excluding the risk-weighted amount of all covered positions (except 
foreign exchange positions outside the trading account and over-the-
counter derivatives positions).\7\
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    \7\ Foreign exchange position 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 
as determined in appendix A of this part 3.
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    (ii) Securities borrowing transactions. In calculating adjusted 
risk-weighted assets, a bank also may exclude a receivable that 
results from the bank'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 
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) (1) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (2) If the transaction does not meet the criteria set forth in 
paragraph (a)(1)(ii)(D)(1) of this section, then either:
    (i) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (A) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (B) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (ii) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (A) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (B) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

0
For the reasons set forth in the joint preamble, part 208 of chapter II 
of title 12 of the Code of Federal Regulations is amended as set forth 
below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

0
1. The authority citation for part 208 continues to read as follows:

    Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a, 
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9), 1823(j), 
1828(o), 1831, 1831o, 1831-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1, and 78w, 6801, and 6805; 31 U.S.C. 
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


0
2. In appendix E to part 208, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix E to Part 208--Capital Adequacy Guidelines for State Member 
Banks; Market Risk Measure

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *

[[Page 8937]]

    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part) excluding the risk-weighted 
amounts of all covered positions (except foreign-exchange positions 
outside the trading account and over-the-counter derivative 
positions) \7\ and receivables arising from the posting of cash 
collateral that is associated with securities borrowing transactions 
to the extent the receivables are collateralized by the market value 
of the borrowed securities, provided that the following conditions 
are met:
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    \7\ 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 
as determined in appendix A of this part.
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    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and
    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
1. The authority citation for part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843( c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, 
and 3909; 15 U.S.C. 6801 and 6805.


0
2. In appendix E to part 225, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies; Market Risk Measure

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *
    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part) excluding the risk-weighted 
amounts of all covered positions (except foreign-exchange positions 
outside the trading account and over-the-counter derivative 
positions) \7\ and receivables arising from the posting of cash 
collateral that is associated with securities borrowing transactions 
to the extent the receivables are collateralized by the market value 
of the borrowed securities, provided that the following conditions 
are met:
    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and
    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The banking organization has conducted sufficient legal 
review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the banking organization the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the banking organization, and the banking 
organization has conducted sufficient legal review to reach a well-
founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the banking organization the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

0
For the reasons set forth in the joint preamble, part 325 of chapter 
III of title 12 of the Code of Federal Regulations is amended as 
follows:

PART 325--CAPITAL MAINTENANCE

0
1. The authority citation for part 325 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; Pub. L. 102-233, 105 Stat. 
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 
2236, 2355, 2386 (12 U.S.C. 1828 note).


0
2. In appendix C to part 325, under section 3, paragraph (a)(1) is 
revised to read as follows:

Appendix C to Part 325--Risk-Based Capital for State Non-Member Banks: 
Market Risk

* * * * *

Section 3. Adjustments to the Risk-Based Capital Ratio Calculations

    (a) * * *
    (1) Adjusted risk-weighted assets. Calculate adjusted risk-
weighted assets, which equals risk-weighted assets (as determined in 
accordance with appendix A of this part), excluding the risk-
weighted amounts of all covered positions (except foreign exchange 
positions outside the trading account and over-the-counter 
derivative positions) \7\ and receivables arising from the posting 
of cash collateral that is associated with securities borrowing 
transactions to the extent the receivables are collateralized by the 
market value of the borrowed securities, provided that the following 
conditions are met:
    (i) The transaction is based on securities includable in the 
trading book that are liquid and readily marketable,
    (ii) The transaction is marked to market daily,
    (iii) The transaction is subject to daily margin maintenance 
requirements, and

[[Page 8938]]

    (iv)(A) The transaction is a securities contract for the 
purposes of section 555 of the Bankruptcy Code (11 U.S.C. 555), a 
qualified financial contract for the purposes of section 11(e)(8) of 
the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a 
netting contract between or among financial institutions for the 
purposes of sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or the 
Board's Regulation EE (12 CFR Part 231); or
    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The bank has conducted sufficient legal review to reach a 
well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default, including in a bankruptcy, 
insolvency, or other similar proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its 
rights under the agreement are legal, valid, binding, and 
enforceable and any exercise of rights under the agreement will not 
be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection 
with the transaction provides the bank the right to accelerate, 
terminate, and close-out on a net basis all transactions under the 
agreement and to liquidate or set off collateral promptly upon an 
event of counterparty default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
* * * * *

    Dated: February 9, 2006.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, February 8, 2006.
Jennifer J. Johnson
Secretary of the Board
    Dated at Washington, DC, this 10th day of February, 2006.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 06-1533 Filed 2-21-06; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P