[Federal Register Volume 76, Number 245 (Wednesday, December 21, 2011)]
[Proposed Rules]
[Pages 79379-79407]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32073]



[[Page 79379]]

Vol. 76

Wednesday,

No. 245

December 21, 2011

Part IV





Department of the Treasury





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 Office of the Comptroller of the Currency





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Federal Reserve System





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 Federal Deposit Insurance Corporation





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12 CFR Parts 3, 208, 225, et al.





 Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit 
Ratings for Debt and Securitization Positions; Proposed Rule

Federal Register / Vol. 76 , No. 245 / Wednesday, December 21, 2011 / 
Proposed Rules

[[Page 79380]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID OCC-2010-0003]
RIN 1557-AC99

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1401]
RIN 7100-AD61

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD70


Risk-Based Capital Guidelines: Market Risk; Alternatives to 
Credit Ratings for Debt and Securitization Positions

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

ACTION: Notice of proposed rulemaking (NPR).

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), and Federal Deposit 
Insurance Corporation (FDIC) (collectively, the agencies) are seeking 
comment on an amendment to the notice of proposed rulemaking (NPR) to 
modify the agencies' market risk capital rules, published in the 
Federal Register on January 11, 2011 (January 2011 NPR). The January 
2011 NPR did not include the methodologies adopted by the Basel 
Committee on Banking Supervision (BCBS) for calculating the standard 
specific risk capital requirements for certain debt and securitization 
positions, because the BCBS methodologies generally rely on credit 
ratings. Under section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Act), all federal agencies must remove 
references to and requirements of reliance on credit ratings from their 
regulations and replace them with appropriate alternatives for 
evaluating creditworthiness. In this NPR, the agencies are proposing to 
incorporate into the proposed market risk capital rules certain 
alternative methodologies for calculating specific risk capital 
requirements for debt and securitization positions that do not rely on 
credit ratings. The agencies expect to finalize this proposal, together 
with the January 2011 NPR, in the coming months after receipt and 
consideration of comments.

DATES: Comments on this notice of proposed rulemaking must be received 
by February 3, 2012.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area and at the 
Agencies is subject to delay, commenters are encouraged to submit 
comments by the Federal eRulemaking Portal or email, if possible. 
Please use the title ``Risk-Based Capital Guidelines: Market Risk'' to 
facilitate the organization and distribution of the comments. You may 
submit comments by any of the following methods:
     Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Select ``Document Type'' of ``Proposed 
Rules,'' and in ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-
2010-0003,'' and click ``Search.'' On ``View By Relevance'' tab at 
bottom of screen, in the ``Agency'' column, locate the proposed rule 
for OCC, in the ``Action'' column, click on ``Submit a Comment'' or 
``Open Docket Folder'' to submit or view public comments and to view 
supporting and related materials for this rulemaking action.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting or viewing public comments, viewing other supporting and 
related materials, and viewing the docket after the close of the 
comment period.
     Email: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2010-0003'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rule by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Select ``Document Type'' of ``Public 
Submissions,'' in ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-
2010-0003,'' and click ``Search.'' Comments will be listed under ``View 
By Relevance'' tab at bottom of screen. If comments from more than one 
agency are listed, the ``Agency'' column will indicate which comments 
were received by the OCC.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. R-[1401], 
by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street NW.) between 9 a.m. and 5 p.m. on weekdays.

[[Page 79381]]

    FDIC: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7 a.m. and 5 p.m.
     Email: comments@FDIC.gov.
    Instructions: Comments submitted must include ``FDIC'' and ``RIN 
3064-AD70.'' Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any 
personal information provided.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Mark Ginsberg, Risk Expert, (202) 927-4580, Roger Tufts, 
Senior Economic Advisor, Capital Policy Division, (202) 874-5070; or 
Carl Kaminski, Senior Attorney, Legislative and Regulatory Activities 
Division, (202) 874-5090, Office of the Comptroller of the Currency, 
250 E Street SW., Washington, DC 20219.
    Board: Anna Lee Hewko, Assistant Director, (202) 530-6260, Tom 
Boemio, Manager, (202) 452-2982, Connie Horsley, Manager, (202) 452-
5239, Division of Banking Supervision and Regulation; or April C. 
Snyder, Senior Counsel, (202) 452-3099, or Benjamin W. McDonough, 
Senior Counsel, (202) 452-2036, Legal Division. For the hearing 
impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-
4869.
    FDIC: Bobby R. Bean, Associate Director, Capital Markets Branch, 
(202) 898-6705; Ryan Billingsley, Chief (Acting), Policy Section, (202) 
898-3797; Karl Reitz, Senior Policy Analyst, (202) 898-6775, Division 
of Risk Management Supervision; or Mark Handzlik, Counsel, (202) 898-
3990; or Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, 
Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    This NPR amends the January 2011 NPR and solicits public comment on 
proposed methodologies for calculating the specific risk capital 
requirements for covered debt and securitization positions under the 
market risk capital rules. Specific risk relates to changes in the 
market value of a position due to factors other than general market 
movements. The proposed methodologies would result in specific risk 
capital requirements for debt and securitization positions that are 
generally consistent with the BCBS's market risk framework, which 
relies on the use of credit ratings. The agencies expect to finalize 
this proposal, together with the January 2011 NPR, in the coming months 
after receipt and consideration of comments.

A. January 2011 NPR

    The January 2011 NPR requested comment on a proposal to implement 
various revisions to the market risk framework adopted by the BCBS \1\ 
between July 2005 and June 2010. The revisions would significantly 
modify the agencies' market risk capital rules \2\ to better capture 
those positions for which application of the market risk capital rules 
are appropriate, address shortcomings in the modeling of certain risks, 
address procyclicality concerns, enhance the rules' sensitivity to 
risks that are not adequately captured under the current regulatory 
capital measurement methodologies, and increase transparency through 
enhanced disclosures.\3\
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    \1\ The BCBS is a committee of banking supervisory authorities, 
which was established by the central bank governors of the G-10 
countries in 1975. It consists of senior representatives of bank 
supervisory authorities and central banks from Argentina, Australia, 
Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, 
India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the 
Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Sweden, 
Switzerland, Turkey, the United Kingdom, and the United States. 
Documents issued by the BCBS are available through the Bank for 
International Settlements Web site at http://www.bis.org.
    \2\ 12 CFR Part 3, appendix B (OCC), 12 CFR parts 208 and 225, 
appendix E (Board), and 12 CFR part 325, appendix C (FDIC).
    \3\ 76 FR 1890 (Jan. 11, 2011).
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    The January 2011 NPR was based on the International Convergence of 
Capital Measurement and Capital Standards: A Revised Framework (Basel 
II or New Accord),\4\ and revisions thereto included in The Application 
of Basel II to Trading Activities and the Treatment of Double Default 
Effects, published jointly by the International Organization of 
Securities Commissions and the BCBS in 2005 (2005 revisions),\5\ as 
well as revisions developed by the BCBS and published in three 
documents in July 2009: Revisions to the Basel II Market Risk 
Framework,\6\ Guidelines for Computing Capital for Incremental Risk in 
the Trading Book,\7\ and Enhancements to the Basel II Framework \8\ 
(collectively, the 2009 revisions). In June 2010, the BCBS published 
additional revisions to the market risk framework that included 
establishing a floor on the risk-based capital requirement for modeled 
correlation trading positions.\9\
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    \4\ Available at, http://www.bis.org/publ/bcbs107.htm.
    \5\ Available at, http://www.bis.org/publ/bcbs111.htm.
    \6\ Available at, http://www.bis.org/publ/bcbs193.htm.
    \7\ Available at, http://www.bis.org/publ/bcbs159.htm.
    \8\ Available at, http://www.bis.org/publ/bcbs/basel2enh0901.htm.
    \9\ The June 2010 revisions can be found in their entirety at 
http://www.bis.org/press/p100618/annex.pdf.
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    Both the 2005 and 2009 revisions include provisions that reference 
credit ratings. In particular, the 2005 revisions provide for the use 
of credit ratings to determine the specific risk add-on for a debt 
position that is a covered position under the standardized measurement 
method. The 2005 and 2009 revisions also expand the ``government'' 
category of debt positions to include all sovereign debt and change the 
specific risk-weighting factor for sovereign debt from zero percent to 
a range of zero to 12.0 percent based on the credit rating of the 
obligor and the remaining contractual maturity of the debt 
position.\10\
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    \10\ In the context of the market risk capital rules, the 
specific risk-weighting factor is a scaled measure that is similar 
to the ``risk weights'' used in the general risk-based capital 
regulations (i.e., the zero, 20 percent, 50 percent, and 100 percent 
risk weights) for determining risk-weighted assets. The measure for 
market risk proposed under the January 2011 NPR is multiplied by 
12.5 to convert it to market risk equivalent assets, which are then 
added to the denominator of the risk-based capital ratio.
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    The 2009 revisions include changes to the specific risk-weighting 
factors for rated and unrated securitization positions. For rated 
securitization positions, the revisions assign a specific risk-
weighting factor based on the credit rating of a position, and whether 
such rating represents a long-term credit rating or a short-term credit 
rating. In addition, the 2009 revisions provide for the application of 
higher specific risk-weighting factors to rated re-securitization 
positions relative to similarly-rated securitization exposures. Under 
the 2009 revisions, unrated positions were to be deducted from total 
capital, except when the unrated position was held by a bank \11\ that 
had approval to use the supervisory formula approach to determine the 
specific risk add-on for the unrated position, when the bank had 
approval to use an approach that used estimates in line

[[Page 79382]]

with the quantitative standards under the advanced approaches rule, or 
when the bank holding the unrated position elected to use the 
concentration ratio approach to calculate the specific risk add-on. 
Under Basel III: A global regulatory framework for more resilient banks 
and banking systems (Basel III), published by the BCBS in December 
2010, and revised in June 2011, certain items, including certain 
securitization positions, that had been deducted from total capital are 
assigned a risk weight of 1,250 percent.
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    \11\ For simplicity, and unless otherwise indicated, the 
preamble to this notice of proposed rulemaking uses the term 
``bank'' to include banks and bank holding companies (BHCs). The 
terms ``bank holding company'' and ``BHC'' refer only to bank 
holding companies regulated by the Board.
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B. Development of Alternative Methodologies

    Section 939A of the Act requires federal agencies to remove from 
their regulations any reference to or requirement of reliance on credit 
ratings in the assessment of creditworthiness of a security or money 
market instrument. Section 939A further requires the agencies to 
substitute in such regulations a standard of creditworthiness that the 
agencies determine to be appropriate in consideration of the entities 
regulated by each such agency and the purposes for which such entities 
would rely on such standards of creditworthiness.
    In view of the requirements of section 939A, when publishing the 
January 2011 NPR, the agencies decided not to propose to implement 
those aspects of the 2005 and 2009 revisions that rely on the use of 
credit ratings. Instead, the January 2011 NPR included as a placeholder 
the treatment under the agencies' current market risk capital rules for 
determining the specific risk add-ons for debt and securitization 
positions. The agencies acknowledged the shortcomings of the current 
treatment and recognized that the treatment would need to be amended in 
accordance with the requirements of section 939A.
    As part of their coordinated effort to implement the requirements 
of section 939A, on August 25, 2010, the agencies published a joint 
advance notice of proposed rulemaking (ANPR) \12\ seeking comment on 
alternative creditworthiness standards for those provisions of the 
agencies' risk-based capital rules that currently reference credit 
ratings. The agencies received 23 comments on the ANPR from banks, 
industry and consumer advocacy groups, and individuals.
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    \12\ 75 FR 52283 (August 24, 2010).
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    Most commenters shared a general concern regarding the removal of 
credit ratings from the risk-based capital rules and asserted that 
credit ratings can be a valuable tool for assessing creditworthiness. 
These commenters also stated that any alternative creditworthiness 
standard used for the purposes of the risk-based capital rules should 
be risk sensitive so as to not incent banks to engage in regulatory 
arbitrage.
    A number of commenters stated that section 939A permits the use of 
credit ratings as a supplement to prudent due diligence reviews. Other 
commenters asserted generally that a legislative change should be 
enacted that would amend section 939A to permit the agencies to 
continue using credit ratings in their regulations. These commenters 
stated that developing a suitable alternative to credit ratings would 
be impossible without creating undue regulatory burden, which would be 
particularly acute for community banks. Many commenters expressed 
concern that a risk-sensitive methodology to replace reliance on credit 
ratings requiring extensive modeling capabilities would 
disproportionately burden community and regional banks. According to 
these commenters, community and regional banks generally do not have 
the internal systems and staff capable of performing a level of 
analysis similar to that performed by credit rating agencies, and thus 
would have to hire third-party vendors.
    Some commenters also stated that any alternative could result in 
inconsistencies with the international capital standards established by 
the BCBS that could place U.S. banks at a competitive disadvantage 
relative to non-U.S. banks. Other commenters stated that exclusive 
reliance on credit ratings is inappropriate, especially for 
securitization exposures for which measuring risk requires 
consideration of specific cash flow structures, collateral, and other 
enhancements.
    Following the release of the ANPR, on November 10, 2010, the Board 
hosted a roundtable discussion attended by staff and principals of the 
agencies, as well as bankers, academics, asset managers, staff of 
credit rating organizations, and others to discuss alternative measures 
of creditworthiness. The roundtable participants reiterated many of the 
concerns expressed by commenters in response to the joint ANPR.\13\
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    \13\ A detailed summary of the views expressed at the roundtable 
discussion is available at: http://www.federalreserve.gov/newsevents/files/credit_ratings_roundtable_20101110.pdf.
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C. Objectives of the Proposed Revisions

    Since the publication of the ANPR and the January 2011 NPR, the 
agencies have been working to develop appropriate alternative 
creditworthiness standards to comply with section 939A of the Act. As 
indicated in the ANPR, the agencies believe that any alternative 
creditworthiness standard should, to the extent possible:
     Appropriately distinguish the credit risk associated with 
a particular exposure within an asset class;
     Be sufficiently transparent, unbiased, replicable, and 
defined to allow banking organizations of varying size and complexity 
to arrive at the same assessment of creditworthiness for similar 
exposures and to allow for appropriate supervisory review;
     Provide for the timely and accurate measurement of 
negative and positive changes in creditworthiness;
     Minimize opportunities for regulatory capital arbitrage;
     Be reasonably simple to implement and not add undue burden 
on banking organizations; and,
     Foster prudent risk management.
    In developing alternative creditworthiness standards in this NPR, 
the agencies strove to incorporate as many of these features as 
possible and to establish capital requirements comparable to those 
published in the 2005 and 2009 revisions to ensure international 
consistency and competitive equity.
    While this NPR concerns the market risk capital rules, the agencies 
believe that it is important to align the methodologies for calculating 
specific risk-weighting factors for debt positions and securitization 
positions in the market risk capital rules with methodologies for 
assigning risk weights under the agencies' other capital rules. Such 
alignment would reduce the potential for regulatory arbitrage between 
rules. Accordingly, the agencies intend to propose, at a later date, to 
revise their general risk-based capital rules \14\ by incorporating 
creditworthiness standards for debt and securitization positions 
similar to the standards included in this proposal. Table 1 shows areas 
in the agencies' current and proposed risk-based capital standards that 
make reference to credit ratings.
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    \14\ The agencies' general risk-based capital rules are at 12 
CFR part 3, Appendix A (OCC); 12 CFR part 208, Appendix A and 12 CFR 
part 225, Appendix A (Board); and 12 CFR part 325, Appendix A 
(FDIC).

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                      Table 1--References to and Use of Credit Ratings Under the Agencies' Current Capital Rules and BCBS Standards
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                                                                               Agencies' capital rules                          BCBS standards
                                                               -----------------------------------------------------------------------------------------
                       Exposure category                          General risk-                                           Basel II
                                                                  based capital      Market risk        Advanced        standardized      Basel market
                                                                      rule         amendment 1996    approaches rule      approach       risk framework
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1. Sovereign..................................................  ................                X   ................                X                 X
2. Multilateral Development Banks.............................  ................                X   ................                X                 X
3. Public Sector Entity.......................................  ................                X   ................                X                 X
4. Bank.......................................................  ................  ................  ................                X                 X
5. Corporate..................................................           X \15\                 X   ................                X                 X
6. Securitization.............................................                X                 X                 X                 X                 X
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II. The Proposed Rule

A. Specific Risk Treatment Under the Agencies' Market Risk Capital 
Rules

    Specific risk relates to changes in the market value of a position 
due to factors other than general market movements. For example, 
general market risk arises from changes in the level of interest rates 
on Treasury securities, from changes in the credit spreads for all 
borrowers of similar credit quality, and from changes in foreign 
exchange rates. These general market risk factors affect the value of 
all positions in a bank's trading account that are driven by changes in 
interest rates, foreign exchange rates, or equity and commodity prices. 
In contrast, specific risk refers to factors that apply singularly to 
an identified position. For example, idiosyncratic credit risk 
associated with a particular issuer of a debt instrument--which makes 
the holder of that instrument vulnerable to losses due to the credit 
quality deterioration of the issuer, or its declaration of bankruptcy--
is specific risk.
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    \15\ Credit ratings are used in the determination of whether a 
securities firm is deemed a qualified securities firm for purposes 
of the general risk-based capital rule.
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    Under the market risk capital rules, a bank may use an internal 
model to measure its exposure to specific risk if it has demonstrated 
to its primary federal supervisor that the model adequately measures 
the specific risk of its debt and equity positions. If a bank does not 
model specific risk, it must calculate its specific risk capital 
requirement, or ``add-on'' using a standardized method.\16\ Under this 
method, the specific risk add-on for debt and securitization positions 
is calculated by multiplying the absolute value of the current market 
value of each net long and net short position in a debt instrument by 
the appropriate specific risk-weighting factor that is specified in the 
rule. These specific risk-weighting factors range from zero to 8.0 
percent and are based on the identity of the obligor and, in the case 
of some positions, the credit rating and remaining contractual maturity 
of the position. The specific risk add-on for a derivative instrument 
is based on the market value of the effective notional amount of the 
underlying position. A bank may net long and short debt positions 
(including derivatives) in identical debt issues or indices. A bank may 
also offset a ``matched'' position in a derivative and its 
corresponding underlying instrument.
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    \16\ See section 5(c) of the agencies' market risk capital rules 
for a description of this method. 12 CFR part 3, appendix B, section 
5(c) (OCC); 12 CFR parts 208 and 225, appendix E, section 5(c) 
(Board); 12 CFR part 325, appendix C, section 5(c) (FDIC).
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    Under the standardized method, the specific risk add-on for equity 
positions is the sum of the bank's net long and short positions in an 
equity position, multiplied by a specific risk-weighting factor. A bank 
may net long and short positions (including derivatives) in identical 
equity issues or equity indices in the same market. The specific risk 
add-on is 8.0 percent of the net equity position, unless the bank's 
portfolio is both liquid and well-diversified, in which case the 
specific risk add-on is 4.0 percent. For positions that are index 
contracts comprising a well-diversified portfolio of equities, the 
specific risk add-on is 2.0 percent of the net long or net short 
position in the index.

B. Overview of the Proposed Revisions

    This rulemaking sets forth methodologies for calculating specific 
risk capital requirements for debt and securitization positions under 
the agencies' proposed market risk capital rule that do not include 
references to credit ratings. To the extent feasible, the agencies have 
calibrated the capital requirements produced under these methodologies 
to be broadly consistent with the capital requirements under the Basel 
standardized measurement method for specific risk. While it is not 
possible to fully align these capital requirements without referencing 
credit ratings, the agencies believe that the capital requirements 
under the proposed methodologies generally would be comparable to those 
produced by the BCBS's standardized measurement method.
    Question 1. The agencies recognize that any measure of 
creditworthiness likely will involve tradeoffs between more refined 
differentiation of risk and greater implementation burden. Do the 
proposed revisions described below strike an appropriate balance 
between measurement of risk and implementation burden in considering 
alternative measures of creditworthiness? Are there other alternatives 
permissible under section 939A of the Act that strike a more 
appropriate balance?
    Together with the new specific risk capital requirements, the 
agencies have included in this proposal a number of definitions 
relevant to the specific risk requirements proposed in this NPR.
1. Sovereign Debt Positions
Background
    The specific risk-weighting factors for sovereign debt positions in 
the current market risk capital rules are based on the membership of 
the sovereign entity in the Organization for Economic Co-operation and 
Development (OECD). Covered debt positions that are exposures to 
sovereign entities that are OECD members receive a zero percent 
specific risk-weighting factor, whereas exposures to sovereign entities 
that are non-OECD members receive an 8.0 percent specific risk-
weighting factor. The general risk-based capital rules assign risk 
weights to credit exposures using the same OECD/non-OECD distinction. 
Under the 2005 revisions, sovereign positions would be assigned 
specific risk-weighting factors based on a given sovereign's external 
credit rating.

[[Page 79384]]

    Table 2 provides the specific risk-weighting factors for sovereign 
debt positions under the 2005 revisions.

     Table 2--BCBS Specific Riskweighting Factors for Sovereign Debt
                   Positions Under the 2005 Revisions
------------------------------------------------------------------------
                                                         Specific risk-
    External credit rating      Remaining contractual   weighting factor
                                       maturity           (in percent)
------------------------------------------------------------------------
Highest investment grade to     .....................               0.00
 second highest investment
 grade (for example, AAA to AA-
 ).
Third highest investment grade  Residual term to                    0.25
 to lowest investment grade      final maturity 6                   1.00
 (for example, A+ to BBB-).      months or less.                    1.60
                                Residual term to
                                 final maturity
                                 greater than 6 and
                                 up to and including
                                 24 months.
                                Residual term to
                                 final maturity
                                 exceeding 24 months.
One category below investment   .....................               8.00
 grade to two categories below
 investment grade (for
 example, BB+ to B-).
More than two categories below  .....................              12.00
 investment grade.
Unrated.......................  .....................               8.00
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Proposed Approach to Sovereign Debt Positions

    Under this NPR, ``sovereign debt position'' would be defined as a 
direct exposure to a sovereign entity. Consistent with the January 2011 
proposal, sovereign entity is defined as a central government or an 
agency, department, ministry, or central bank of a central government. 
A sovereign entity would not include commercial enterprises owned by 
the central government that are engaged in activities involving trade, 
commerce, or profit, which are generally conducted or performed in the 
private sector.
    The agencies are proposing that a bank determine its specific risk-
weighting factors for sovereign debt positions based on OECD Country 
Risk Classifications (CRCs).\17\ The OECD's CRCs are used for 
transactions covered by the OECD arrangement on export credits in order 
to provide a basis under the arrangement for participating countries to 
calculate the premium interest rate to be charged to cover the risk of 
non-repayment of export credits.
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    \17\ Please refer to http://www.oecd.org/document/49/0,3343,en_2649_34169_1901105_1_1_1_1,00.html for more information on the 
OECD country risk classification methodology.
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    The agencies believe that use of CRCs in the proposal is 
permissible under section 939A of the Dodd-Frank Act. Section 939A is 
part of Subtitle C of Title IX of the Dodd-Frank Act, which, among 
other things, enhances regulation by the U.S. Securities and Exchange 
Commission (SEC) of credit rating agencies, including Nationally 
Recognized Statistical Rating Organizations (NRSROs) registered with 
the SEC, and removes references to credit ratings and NRSROs from 
federal statutes. In the introductory ``findings'' section to Subtitle 
C, which is entitled ``Improvements to the Regulation of Credit Ratings 
Agencies,'' Congress characterized credit rating agencies as 
organizations that play a critical ``gatekeeper'' role in the debt 
markets and perform evaluative and analytical services on behalf of 
clients, and whose activities are fundamentally commercial in 
character.\18\ Furthermore, the legislative history of section 939A 
focuses on the conflicts of interest of credit rating agencies in 
providing credit ratings to their clients, and the problem of 
government ``sanctioning'' of the credit rating agencies' credit 
ratings by having them incorporated into federal regulation.
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    \18\ See Public Law 111-203, section 931.
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    The agencies believe that section 939A was not intended to apply to 
assessments of creditworthiness of organizations such as the OECD. The 
OECD is not subject to the sorts of conflicts of interest that affected 
NRSROs because the OECD is not a commercial entity that produces credit 
assessments for fee-paying clients, nor does it provide the sort of 
evaluative and analytical services as credit rating agencies. 
Additionally, the agencies note that the use of the CRCs is limited in 
the proposal and that the agencies are considering additional measures 
that could supplement the CRCs to determine risk-weighting factors for 
sovereign debt positions.
    Question 2: The agencies solicit comment on the use of the CRC 
ratings to assign specific risk-weighting factors to sovereign debt 
positions.
    The CRC methodology is used by the OECD to assess country credit 
risk. CRCs are produced generally for the purpose of setting minimum 
premium rates for transactions covered by the OECD's Export Credit 
Arrangement. The CRC methodology was established in 1999 and classifies 
countries into categories based on the application of two basic 
components: the country risk assessment model (CRAM), which is an 
econometric model that produces a quantitative assessment of country 
credit risk; and the qualitative assessment of the CRAM results, which 
integrates political risk and other risk factors not fully captured by 
the CRAM. The two components of the CRC methodology are combined and 
result in countries being classified into one of eight risk categories 
(0-7), with countries assigned to the 0 category having the lowest 
possible risk assessment and countries assigned to the 7 category 
having the highest.
    The agencies consider CRCs to be a reasonable alternative to credit 
ratings and to be more granular than the current treatment based on 
OECD membership. The OECD regularly updates CRCs for over 150 
countries. Also, CRCs are recognized by the BCBS as an alternative to 
credit ratings.\19\
---------------------------------------------------------------------------

    \19\ New Accord at paragraph 55.
---------------------------------------------------------------------------

    However, the agencies recognize that CRCs have certain limitations. 
While the OECD has published a general description of the methodology 
for CRC determinations, the methodology is largely principles-based and 
does not provide details regarding the specific information and data 
considered to support a CRC. Also, OECD-member sovereigns that are 
defined to be ``high-income countries'' by the World Bank are assigned 
a CRC of zero, the most favorable classification.\20\ As such, a CRC 
classification may not accurately reflect a high income OECD country's 
relative risk of default. Additionally, while the OECD reviews 
qualitative

[[Page 79385]]

factors for each sovereign on a monthly basis, quantitative financial 
and economic information used to assign CRCs is available only annually 
in some cases, and payment performance is updated quarterly. The 
agencies are concerned that, in some cases, the CRC may misclassify 
risks for purposes of assessing risk-based capital requirements, 
particularly where sovereign debt restructuring has occurred. In such 
cases, the CRC appears to assess the risk associated with the 
sovereign's payment of the restructured debt and may not fully reflect 
the credit event associated with the restructuring.
---------------------------------------------------------------------------

    \20\ OECD, premium related conditions: Explanation of the 
premium rules of the arrangement on officially supported export 
credits (the Knaepen Package), 06, July-2004, p. 3, n5.
---------------------------------------------------------------------------

    To alleviate concerns about potential misclassifications, the 
agencies are proposing to apply a specific risk-weighting factor of 
12.0 percent to sovereign debt positions where the sovereign has 
defaulted on any exposure during the previous five years. The proposed 
rule would define a default by a sovereign as noncompliance by a 
sovereign entity with its external debt service obligations or the 
inability or unwillingness of a sovereign entity to service an existing 
obligation according to its terms, as evidenced by failure to make full 
and timely payments of principal and interest, arrearages, or 
restructuring. A default would include a voluntary or involuntary 
restructuring that results in a sovereign entity not servicing an 
existing obligation in accordance with the obligation's original terms.
    For purposes of the proposed rule, the agencies assigned specific 
risk-weighting factors to CRCs in a manner consistent with the 
assignment of risk weights to CRCs under the Basel II standardized 
framework, as set forth in table 3.

     Table 3--Mapping of CRC to Risk Weights Under the Basel Accord
------------------------------------------------------------------------
                                                         Risk weight (in
                   CRC classification                        percent)
------------------------------------------------------------------------
0-1....................................................                0
2......................................................               20
3......................................................               50
4 to 6.................................................              100
7......................................................              150
No classification assigned.............................              100
------------------------------------------------------------------------

    Similar to the 2005 revisions, the proposed specific risk-weighting 
factors for sovereign debt positions would range from zero percent for 
those assigned a CRC of 0 or 1 to 12.0 percent for a sovereign position 
assigned a CRC of 7. Also similar to the 2005 revisions, the specific 
risk-weighting factor for certain sovereigns that are deemed to be low 
credit risk based on their CRC would vary depending on the remaining 
maturity of the position. The proposed specific risk-weighting factors 
for sovereign debt positions are shown in Table 4.

  Table 4--Proposed Specific Risk-Weighting Factors for Sovereign Debt
                                Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
        Sovereign CRC              Specific risk-weighting factor (in
                                                percent)
------------------------------------------------------------------------
0-1..........................                      0.0
                              ------------------------------------------
2-3..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                final maturity
                                greater than 6 and
                                up to and including
                                24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------
4-6..........................                      8.0
                              ------------------------------------------
7............................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------

    As under the general risk-based capital rules, a bank may assign to 
a sovereign debt position a specific risk-weighting factor that is 
lower than the applicable specific risk-weighting factor in Table 4 if 
the position is denominated in the sovereign entity's currency, the 
bank has at least an equivalent amount of liabilities in that currency, 
and the sovereign entity allows banks under its jurisdiction to assign 
the lower specific risk-weighting factor to the same position.
    The agencies have included exceptions to this general approach. For 
instance, sovereign debt positions that are exposures to the United 
States government and its agencies always would be treated as having a 
CRC of zero, and sovereign debt positions of sovereign entities that 
have no CRC generally would be assigned an 8.0 percent specific risk-
weighting factor.
Alternative Market-based Approaches for Sovereign Debt Positions
    In developing the proposed rule, the agencies considered a range of 
financial and market-based alternatives to the use of credit ratings, 
either as a replacement for or to supplement the use of CRCs. Two 
possible market-based indicators are sovereign credit default swap 
(CDS) spreads, or bond spreads. Both of these market-based indicators 
could be more ``forward looking'' than indicators based on historical 
information, and, under such an approach, banks would assign specific 
risk-weighting factors based on whether the CRC or the spread 
methodology indicated a higher capital requirement. Use of these 
market-based indicators along with CRCs could also improve overall 
accuracy in assignment of specific risk-weighting factors, especially 
for certain high-income OECD countries.
    Credit default swap spreads for a given sovereign could be used to 
assign specific risk-weighting factors, with higher CDS spreads 
resulting in assignments of higher specific risk-weighting factors. The 
presumption is that CDS spreads will reflect market perception of a 
sovereign's default risk. To make such an approach practicable, the 
agencies would need to implement a methodology that mitigates concerns 
regarding volatility and information content of CDS spreads. For 
instance, the agencies could require use of five-year CDS premiums, 
which are the most liquid contracts traded and are generally considered 
the most widely-recognized benchmark in this context. To limit 
volatility concerns, the CDS spread could be calculated as a one-year, 
rolling daily average of a sovereign's CDS premium. To focus on 
country-specific levels of risk premiums, the agencies could subtract a 
designated

[[Page 79386]]

base rate, for example, 50 basis points, which is based on the long-
term historical average of United States CDS spreads. Table 5 
illustrates how CDS spreads and CRCs could be used together to assign 
specific risk-weighting factors. In order to have an approach that uses 
CDS spreads and CRCs, a position's specific risk-weighting factor would 
be based on the higher of the specific risk-weighting factors required 
by the sovereign's CRC rating and its CDS spread from table 5. To 
illustrate this approach, assume a sovereign is assigned a zero CRC 
rating and the one year average of the five-year CDS spread of the 
sovereign is 150 basis points above the base rate. Since the specific 
risk-weighting factor assigned to the CDS spread is higher than the 
specific risk-weighting factor assigned to the CRC rating, the 
applicable risk-weighting factor for positions that are exposures to 
that sovereign would be based on the CDS spread, or 4.0 percent.

  Table 5--Specific Risk-Weighting Factors for Sovereign Debt Positions
                       Using CDS Spreads and CRCs
------------------------------------------------------------------------
Range of the one-year average of                        Specific  risk-
the five-year CDS spread above a          CRC          weighting factor
      50 basis point spread                            (in percent) for
------------------------------------------------------------------------
0-100 basis points..............                 0-2                 0.0
Greater than 100 to 250 basis                      3                 4.0
 points.........................
Greater than 250 to 500 basis                    4-6                 8.0
 points.........................
Greater than 500 basis points...                   7                12.0
------------------------------------------------------------------------

    Sovereign bond spreads could also be used to assign specific risk-
weighting factors, with higher bond credit spreads for a given 
sovereign resulting in higher risk specific risk-weighting factors, 
similar to the methodology described above for CDS spreads. As with CDS 
spreads, the presumption is that sovereign bond credit spreads reflect 
market expectations of default risk. However, in order to use bond 
credit spreads, the agencies would need to address certain challenges. 
For example, sovereign bonds usually are denominated in the currency of 
the country of issuance and spreads that are calculated from sovereign 
bond yields in different currencies would reflect factors other than 
credit risk, such as the sovereign's inflation rate and its currency's 
exchange rate with other currencies. Therefore, it would be difficult 
to determine what portion of a sovereign's total bond spread reflects 
credit risk. As a result, it also would be difficult to compare the 
relative likelihood of default among sovereign debt positions.
    A possible solution could be to use only bonds denominated in U.S. 
dollars, and perhaps one or two other major currencies as base 
currencies. Under such an approach, a ``base'' obligation with 
relatively low credit risk (in the case of U.S. dollar-denominated 
notes, a U.S. Treasury bond) would be identified and the spread between 
that obligation and that of bonds issued by other sovereign entities in 
the same currency with similar remaining maturity would be used to 
assign the specific risk-weighting factor. A similar process could be 
used for bonds denominated in euros, with the issuance of a particular 
sovereign entity deemed low credit risk based on a certain period of 
market history providing the ``base'' rate to which other euro-
denominated bonds of similar remaining maturity would be compared in 
order to determine the specific risk-weighting factor for those 
obligations.
    Such an approach may be limited in scope as many sovereign entities 
either do not issue bonds in currencies other than their own, or issue 
very small amounts. For instance, approximately 70 countries have some 
U.S. dollar-denominated debt outstanding, but such issuances are 
usually infrequent and small in dollar volume. Issuances of euro- and 
yen-denominated bonds are much less frequent than those of dollar-
denominated bonds. In addition, some of the problems involved in 
incorporating a methodology based on CDS spreads could also be relevant 
to a bond spread methodology.
    Question 3: How well does the proposed methodology assign specific 
risk-weighting factors to sovereign debt positions that are 
commensurate with the relative risk of such exposures? How could it be 
improved? What are the relative merits of the two market-based 
alternatives described above (using sovereign CDS spreads and bond 
spreads) as supplements to the CRC ratings?
2. Exposures to Certain Supranational Entities and Multilateral 
Development Banks
    Under the agencies' current market risk capital rules, debt 
positions that are exposures to certain supranational entities and 
multilateral development banks (MDBs) receive specific risk-weighting 
factors that range between 0.25 percent and 1.6 percent, depending on 
their remaining maturity. Under the Basel market risk framework, as 
revised, these positions continue to receive the same treatment as in 
the agencies' current market risk capital rules.
    The proposed rule defines an MDB to include the International Bank 
for Reconstruction and Development, the Multilateral Investment 
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Bank for Reconstruction and Development, 
the European Investment Bank, the European Investment Fund, the Nordic 
Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. government is a shareholder or contributing member or which 
the bank's primary federal supervisor determines poses comparable 
credit risk.
    Consistent with the treatment of exposures to supranational 
entities under the New Accord, the agencies are proposing to assign a 
zero percent specific risk-weighting factor to debt positions that are 
exposures to the Bank for International Settlements, the European 
Central Bank, the European Commission, and the International Monetary 
Fund.
    Generally consistent with the Basel framework, the agencies also 
are proposing to apply a zero percent specific risk-weighting factor to 
debt positions that are exposures to MDBs, as defined in the proposed 
rule. This treatment is based on these MDBs' generally high-credit 
quality, strong shareholder support, and a shareholder structure 
comprised of a significant proportion of sovereign entities with strong 
creditworthiness.

[[Page 79387]]

    Debt positions that are exposures to other regional development 
banks and multilateral lending institutions that do not meet these 
requirements would generally be treated as corporate debt positions and 
would be subject to the proposed methodology, as described below.
3. Exposures to Government Sponsored Entities
    Under the current market risk capital rules, debt positions that 
are exposures to government sponsored entities (GSEs) \21\ are assigned 
specific risk-weighting factors ranging from 0.25 percent to 1.6 
percent, depending on maturity. For the purposes of this proposal, a 
GSE would be defined as an agency or corporation originally established 
or chartered by the U.S. Government to serve public purposes specified 
by the U.S. Congress, but whose obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government. In this 
proposal, and consistent with the treatment of these positions in the 
current market risk capital rules, the agencies propose to apply 
specific risk-weighting factors ranging from 0.25 percent to 1.6 
percent to debt positions that are exposures to GSEs based on the 
remaining maturity of the position. GSE equity exposures, including 
preferred stock, would be assigned a specific risk-weighting factor of 
8.0 percent.
---------------------------------------------------------------------------

    \21\ These agencies include the Federal Home Loan Mortgage 
Corporation, the Federal National Mortgage Association, the Farm 
Credit System, and the Federal Home Loan Bank System.
---------------------------------------------------------------------------

4. Debt Positions That Are Exposures to Depository Institutions, 
Foreign Banks, and Credit Unions
    Under the current market risk capital rules, debt positions that 
are exposures to banks incorporated in OECD countries generally are 
assigned a specific risk-weighting factor ranging from 0.25 percent to 
1.6 percent based on remaining maturity of the position. Banks that are 
not incorporated in an OECD country are assigned similar specific risk-
weighting factors if certain conditions are met, including the presence 
of an investment-grade rating from a credit rating agency or 
assessments of comparable credit quality by the investing bank. Higher 
specific risk-weighting factors are assigned to positions that are 
rated below investment grade or deemed to be of comparable credit 
quality. The Basel market risk framework also makes use of credit 
ratings to assign specific risk-weighting factors to these positions.
    This proposal would eliminate the distinction based on OECD 
membership for the purpose of the market risk capital rules and instead 
apply specific risk-weighting factors to debt positions that are 
exposures to depository institutions,\22\ foreign banks, or credit 
unions \23\ based on the applicable specific risk-weighting factor of 
the entity's sovereign of incorporation, as shown in Table 6. For 
example, debt positions that are exposure to a bank incorporated in a 
country with a CRC of 1 would be assigned a specific risk-weighting 
factor ranging from 0.25 percent to 1.6 percent depending on the 
remaining maturity of the position. For purposes of this proposal, 
sovereign of incorporation means the country where an entity is 
incorporated, chartered, or similarly established. If an entity's 
sovereign of incorporation is assigned to the 8.0 percent specific 
risk-weighting factor because of a lack of CRC rating, then the debt 
position that is an exposure to that entity would also be assigned an 
8.0 percent specific risk-weighting factor.
---------------------------------------------------------------------------

    \22\ A depository institution is defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813), and foreign bank 
means a foreign bank as defined in Sec.  211.2 of the Federal 
Reserve Board's Regulation K (12 CFR 211.2), other than a depository 
institution.
    \23\ Under this proposal, a credit union is defined as an 
insured credit union as defined under the Federal Credit Union Act 
(12 U.S.C. 1752).

  Table 6--Specific Risk-Weighting Factors for Depository Institution,
              Foreign Bank, and Credit Union Debt Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     CRC of sovereign of           Specific risk-weighting factor (in
        incorporation                           percent)
------------------------------------------------------------------------
0-2..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                maturity up to and
                                including 24 months.
 Residual term to final        1.6..................
 maturity exceeding 24 months
------------------------------------------------------------------------
3............................                      8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------

    Consistent with the general risk-based capital rules, debt 
positions that are exposures to a depository institution or foreign 
bank that are includable in the regulatory capital of that entity, but 
that are not subject to deduction as a reciprocal holding would be 
assigned a specific risk-weighting factor of at least 8.0 percent.\24\
---------------------------------------------------------------------------

    \24\ 12 CFR part 3, Appendix A, section 2(c)(6)(ii) (OCC); 12 
CFR parts 208 and 225, Appendix A, section II.B.3 (FRB); 12 CFR part 
325, Appendix A, I.B.(4) (FDIC).
---------------------------------------------------------------------------

    Question 4: How well does the proposed methodology assign specific 
risk-weighting factors that are commensurate with the relative risk of 
positions that are exposures to depository institutions, foreign banks, 
and credit unions?
5. Exposures to Public Sector Entities (PSEs)
    The agencies' current market risk capital rules assign specific 
risk-weighting factors to general obligations of states and other 
political subdivisions of OECD countries that range from 0.25 percent 
to 1.6 percent based on maturity.\25\ Positions that are revenue 
obligations of states and other political subdivisions of OECD 
countries are treated in the same manner if certain conditions are met. 
These conditions include the presence of an investment grade rating or 
an assessment of comparable credit quality by the bank holding the 
covered position. The 2005 revisions to the Basel market risk framework 
use credit ratings to assign specific risk-weighting factors.
---------------------------------------------------------------------------

    \25\ Political subdivisions include a state, county, city, town 
or other municipal corporation, a public authority, and generally 
any publicly owned entity that is an instrument of a state or 
municipal corporation.
---------------------------------------------------------------------------

    The proposed rule defines a PSE as a state, local authority, or 
other

[[Page 79388]]

governmental subdivision below the level of a sovereign entity. This 
definition does not include commercial companies owned by a government 
that engage in activities involving trade, commerce, or profit, which 
are generally conducted or performed in the private sector. The 
agencies propose that the specific risk-weighting factor assigned to a 
debt position that is an exposure to a PSE be based on the CRC assigned 
to the country of incorporation of the PSE, as well as whether the 
position is a general obligation or a revenue obligation of the PSE. 
This methodology is similar to the approach under the Basel II 
standardized approach for credit risk, which allows a bank to assign a 
risk weight to PSEs based on the credit rating of the sovereign of 
incorporation of the PSE.
    A general obligation is defined as a bond or similar obligation 
that is guaranteed by the full faith and credit of states or other 
political subdivisions of a sovereign entity. Revenue obligation is 
defined as a bond or similar obligation that is an obligation of a 
state or other political subdivision of a sovereign entity, but which 
the government entity is committed to repay with revenues from a 
specific project financed rather than with general tax funds.
    For example, two debt positions with a remaining maturity exceeding 
24 months that are exposures to the same PSE--one a general obligation 
and the other a revenue obligation--would be assigned different 
specific risk-weighting factors as follows: if the sovereign of 
incorporation has a CRC of 2, the general obligation debt position 
would receive a 1.6 percent specific risk-weighting factor, and the 
revenue obligation debt position would receive a 8.0 percent specific 
risk-weighting factor. If a PSE's sovereign of incorporation was 
assigned to the 8.0 percent specific risk-weighting factor due to a 
lack of a CRC, then a debt position that is an exposure to that PSE 
also would be assigned an 8.0 percent specific risk-weighting factor.
    The specific risk-weighting factors for debt positions that are 
general obligations and revenue obligations of PSEs, based on the PSE's 
country of incorporation, are shown in Tables 7 and 8, respectively.

  Table 7--Specific Risk-Weighting Factors for General Obligation Debt
                            Positions in PSEs
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     Sovereign CRC rating       General obligation claims risk-weighting
                                           factor (in percent)
------------------------------------------------------------------------
0-2..........................  Residual term to                     0.25
                                final maturity 6
                                months or less
                               Residual term to                      1.0
                                final maturity
                                greater than 6 and
                                up to and including
                                24 months
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months
                              ------------------------------------------
3............................                      8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------


 Table 8--Specific Risk-Weighting Factors for Revenue Obligation Covered
                            Positions in PSEs
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     Sovereign CRC rating       Revenue obligation risk-weighting factor
                                              (in percent)
------------------------------------------------------------------------
0-1..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                final maturity
                                greater than 6 and
                                up to and including
                                24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------
2-3..........................                      8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------

    In certain cases, the agencies have allowed a bank to use specific 
risk-weighting factors assigned by a foreign banking supervisor to debt 
positions that are exposures to PSEs in that supervisor's home country. 
Therefore, the agencies propose to allow a bank to assign a specific 
risk-weighting factor to a debt position that is an exposure to a 
foreign PSE according to the specific risk-weighting factor that the 
foreign banking supervisor assigns. In no event, however, may the 
specific risk-weighting factor for such a position be lower than the 
lowest specific risk-weighting factor assigned to that PSE's sovereign 
of incorporation.
    Question 5: How well does this method of assigning specific risk-
weighting factors to positions that are exposures to PSEs do so in a 
manner that is consistent and commensurate with the relative risk of 
such exposures? How could it be improved?
6. Corporate Debt Positions
Background
    The current market risk capital rules specific risk-weighting 
factors for debt and securitization positions are based on the BCBS's 
1996 market risk framework. Under the current rules, capital 
requirements are a function of the type of obligor, the credit rating 
of the obligor, and the remaining maturity of the exposure (see Table 
9).

[[Page 79389]]



  Table 9--Specific Risk--Weighting Factors for Covered Corporate Debt
         Positions Under the Agencies' Market Risk Capital Rules
------------------------------------------------------------------------
                                                        Specific risk-
           Category              Remaining maturity    weighting factor
                                   (contractual)         (in percent)
------------------------------------------------------------------------
Qualifying \1\...............  6 months or less.....                0.25
                               Over 6 months to 24                  1.00
                                months.
Other \2\....................  Over 24 months.......                1.60
                               N/A..................                8.00
------------------------------------------------------------------------
\1\ The ``qualifying'' category includes debt instruments that are: (1)
  Rated investment grade by at least two nationally recognized credit
  rating services; (2) rated investment grade by one nationally
  recognized credit rating agency and not rated less than investment
  grade by any other credit rating agency; or (3) unrated, but deemed to
  be of comparable investment quality by the reporting bank and the
  issuer has instruments listed on a recognized stock exchange, subject
  to supervisory review.
\2\ The ``other'' category includes debt instruments that are not
  included in the government or qualifying categories.

    Under the agencies' general risk-based capital rules, exposures to 
companies, generally are assigned to the 100 percent risk weight 
category. A 20 percent risk weight is assigned to bank claims on, or 
guaranteed by, a securities firm incorporated in an OECD country, that 
satisfy certain conditions.\26\
---------------------------------------------------------------------------

    \26\ See 12 CFR part 3, appendix A, section 3(2)(xiii) (OCC); 12 
CFR parts 208 and 225, appendix A, section III.C.2 (Board), 12 CFR 
part 325, appendix A, section II.C, Category 2-20 Percent Risk 
Weight (FDIC).
---------------------------------------------------------------------------

    The 2005 revisions to the BCBS market risk framework change the 
standardized measurement method for calculating specific risk add-ons 
for debt positions. Among the changes, the specific risk-weighting 
factor for debt positions rated more than two categories below 
investment grade increased from 8.0 percent to 12.0 percent (see Table 
10).

 Table 10--BCBS 2005 Specific Risk-Weighting Factors for Corporate Debt
                                Positions
------------------------------------------------------------------------
                                                        Specific risk-
    External credit rating     Remaining contractual   weighting factor
                                      maturity           (in percent)
------------------------------------------------------------------------
Qualifying \1\...............  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                     1.00
                                final maturity
                                greater than 6 and
                                up to and including
                                24 months.
                               Residual term to                     1.60
                                final maturity
                                exceeding 24 months.
One category below investment  .....................                8.00
 grade to two categories
 below investment grade (for
 example, BB+ to B-), or
 equivalent based on a bank's
 internal ratings.
More than two categories       .....................               12.00
 below investment grade, or
 equivalent based on a bank's
 internal ratings.
Unrated......................  .....................                8.00
------------------------------------------------------------------------
\1\ Under the 2005 revisions, the qualifying category includes non-
  sovereign debt positions that are: (i) Rated investment grade by at
  least two credit rating agencies specified by national authority; or
  (ii) rated investment grade by one credit rating agency and not rated
  less than investment grade by any other credit rating agency specified
  by national authority (subject to supervisory oversight); or (iii)
  subject to supervisory approval, unrated, but deemed to be of
  comparable investment quality by the reporting bank, and the issuer
  has securities listed on a recognized stock exchange.

Overview of Proposed Methodology for Corporate Debt Positions
    In this NPR, the agencies propose to permit a bank to use a 
methodology that uses market-based information and historical 
accounting information (indicator-based methodology) to assign specific 
risk-weighting factors to corporate debt positions that are exposures 
to a publicly-traded entity that is not a financial institution, and to 
assign a specific risk-weighting factor of 8.0 percent to all other 
corporate debt positions excluding those that are exposures to a 
depository institution, foreign bank, or credit union, which are 
addressed above. The agencies propose to categorize financial 
institutions separately from other entities because of the differences 
in their balance sheet structures. As a simple alternative, a bank may 
assign an 8.0 percent specific risk-weighting factor to all of its 
corporate debt positions.
    The proposal would define a ``corporate debt position'' to mean a 
debt position that is an exposure to a company that is not a sovereign 
entity, the Bank for International Settlements, the European Central 
Bank, the European Commission, the International Monetary Fund, a 
multilateral development bank, a depository institution, a foreign 
bank, a credit union, a PSE, a GSE, or a securitization. As discussed 
above, the entities scoped out of the definition of corporate debt 
positions would receive different treatment under the proposal.
    The proposal includes the following definition of ``financial 
institution'' to distinguish between companies that are primarily 
engaged in financial activities and those that are not. Under the 
proposal, a financial institution would be defined as:
    (1) A commodity pool as defined in section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10));
    (2) A private fund as defined in section 202(a) of the Investment 
Advisors Act of 1940 (15 U.S.C. 80-b-2(a)); except for small business 
investment companies, as defined in section 102 of the Small Business 
Investment Act of 1958 (15 U.S.C. 662), or a private fund designed 
primarily to promote the public welfare, of the type permitted under 
section 24 (Eleventh) of the National Bank Act (12 U.S.C. 24 
(Eleventh)) and 12 CFR part 24;
    (3) An employee benefit plan as defined in paragraphs (3) and (32) 
of

[[Page 79390]]

section 3 of the Employee Retirement Income and Security Act of 1974 
(29 U.S.C. 1002);
    (4) A bank holding company, depository institution, foreign bank, 
credit union, insurance company, or a securities firm, other than an 
entity selected as a Community Development Financial Institution (CDFI) 
under 12 U.S.C. 4701 et seq. and 12 CFR part 1805;
    (5) Any other company predominantly engaged in activities that are 
(i) in the business of banking under section 24 (Seventh) of the 
National Bank Act (12 U.S.C. 24), or (ii) in activities that are 
financial in nature under section 4(k) of the Bank Holding Company of 
1956 (12 U.S.C. 1843(k)) as of the date this subpart becomes effective 
(collectively, ``financial activities''); provided that, if the company 
is not an affiliate of the bank calculating its capital requirements 
under the proposed rule, then the bank may exclude activities set forth 
on Schedule A when determining whether the company is predominantly 
engaged in financial activities.
    (6) Any non-U.S. entity that would be covered by any of paragraphs 
(1) through (5) if such entity was organized in the United States; or
    (7) Any other company that an agency may determine is a financial 
institution based on the nature and scope of its activities.
    (8) For the purposes of the proposed rule, a company would be 
``predominantly engaged'' in financial activities, if:
    (i) 85 percent or more of the total consolidated annual gross 
revenues (as determined in accordance with applicable accounting 
standards) of the company in either of the two most recent calendar 
years were derived, directly or indirectly, by the company on a 
consolidated basis from financial activities; or
    (ii) 85 percent or more of the company's consolidated total assets 
(as determined in accordance with applicable accounting standards) as 
of the end of either of the two most recent calendar years were related 
to financial activities.
    For the purpose of determining whether a company is predominantly 
engaged in financial activities under the proposed definition, the 
agencies have determined that certain financial activities may be 
excluded for determination regarding companies that are not affiliates 
of the bank. These activities are listed in Schedule A in the NPR. For 
purposes of the definition of financial institution, the agencies 
propose to define affiliate with respect to a bank to mean any company 
that controls, is controlled by, or is under common control with, the 
bank.
    Question 6: The agencies seek comment on the proposed definition of 
``financial institution.'' The agencies have sought to achieve 
consistency in the definition of financial institution with similar 
definitions proposed for other regulations.\27\ In particular, the 
agencies have incorporated the standard for ``predominantly engaged'' 
in financial activities similar to the standard from the Board's 
proposed rule to define ``predominantly engaged in financial 
activities'' for purposes of Title I of the Dodd-Frank Act.\28\ The 
agencies seek comment on the appropriateness of this standard for 
purposes of the proposed rule and whether a different threshold, such 
as greater than 50 percent, would be more appropriate. Responses should 
provide detailed explanations.
---------------------------------------------------------------------------

    \27\ See the definition of ``financial end user'' in the 
proposed rule to implement provisions of the Dodd-Frank Act 
regarding margin and capital requirements for certain swap entities. 
76 FR 27564 (May 11, 2011).
    \28\ See 76 FR 7731 (February 11, 2011).
---------------------------------------------------------------------------

Methodology for Positions That Are Exposures to Publicly-Traded, Non-
Financial Corporate Entities
    To use the proposed indicator-based methodology, a bank must 
calculate the following: (1) Leverage, measured by the ratio of total 
liabilities (DEBT) to the market value of assets (A); (2) cash flow, 
measured as the ratio of earnings before interest expense, taxes, 
depreciation and amortization (EBITDA) to a market value of assets; and 
(3) monthly stock return volatility (VOL). In order to assign a 
corporate debt position a specific risk-weighting factor using the 
indicator-based methodology, a bank would be required to use publicly 
available financial data to calculate a value for each of the three 
indicators. Separate calculations would be made for each quarterly 
regulatory financial report. The calculation of debt would be based on 
liabilities reported as of the end of the most recent calendar quarter. 
Assets would be measured as the sum of the product of the number of 
outstanding shares as of the end of the most recent calendar quarter 
multiplied by the entity's stock price on the last trading day of the 
most recent calendar quarter plus the measure of liabilities reported 
as of the end of the most recent calendar quarter. To calculate EBITDA 
for the three-indicator methodology, a bank would use EBITDA for the 
four most recent calendar quarters. The EBITDA-to-assets ratio would be 
calculated by dividing an entity's cumulative EBITDA over the previous 
four quarters by its equity market value plus total liabilities as 
reported as of the end of the most recent quarter. So, for example, 
when measuring EBITDA on March 31, 2012, the bank likely would use 
EBITDA for the period from January 1, 2011, to December 31, 2011. Stock 
return volatility would be measured as the standard deviation of the 
corporate obligor's monthly stock return as of the last trading day of 
each month over the immediate preceding 12 months. So, for example, 
stock return volatility measured as of March 31, 2012, would be based 
on the entity's stock returns calculated using prices as of the last 
trading day of the months of March 2011 to March 2012, adjusted for 
stock splits.
    After calculating the three indicators, a bank would assign the 
debt position that is an exposure to a publicly traded, non-financial 
institution to a specific risk-weighting factor using table 11. Similar 
to the current market risk capital rules and the 2005 revisions, 
certain high-credit-quality debt positions would be assigned a specific 
risk-weighting factor based on the residual maturity of the debt as 
shown in tables 11 and 11A.

      Table 11--Specific Risk-Weighting Factors for Non-Financial Publicly-Traded Corporate Debt Positions
----------------------------------------------------------------------------------------------------------------
                                                              Specific risk-weighting factor (in percent)
                                                     -----------------------------------------------------------
     EBITDA-to-assets ratio          Stock return       Debt-to-assets      Debt-to-assets      Debt-to-assets
                                  volatility measure    ratio less than    ratio between 0.2  ratio greater than
                                                              0.2               and 0.5               0.5
----------------------------------------------------------------------------------------------------------------
Greater than zero...............  less than 0.1.....                 (1)                 8.0                 8.0
                                  between 0.1 and                    8.0                 8.0                 8.0
                                   0.15.

[[Page 79391]]

 
                                  greater than 0.15.                 8.0                 8.0                12.0
Less than zero..................  less than 0.1.....                 8.0                 8.0                 8.0
                                  between 0.1 and                    8.0                 8.0                12.0
                                   0.15.
                                  greater than 0.15.                12.0                12.0                12.0
----------------------------------------------------------------------------------------------------------------
1 See Table 11A.


Table 11A--Specific Risk-Weighting Factors Non-Financial Publicly Traded
                         Company Debt Positions
------------------------------------------------------------------------
                                                        Specific risk-
           Remaining contractual maturity              weighting factor
                                                         (in percent)
------------------------------------------------------------------------
Residual term to final maturity 6 months or less....                0.25
Residual term to final maturity greater than 6                       1.0
 months and up to and including 24 months...........
Residual term to final maturity exceeding 24 months.                 1.6
------------------------------------------------------------------------

    These three indicators represent market-based information and 
historical accounting data found in both industry practice and academic 
literature for estimating the likelihood of default. In calibrating 
specific risk-weighting factors using these three indicators, the 
agencies tried to balance the trade-offs between enhanced risk 
sensitivity and relative simplicity and ease of use. The three 
indicators chosen were found to yield relatively comparable results in 
terms of credit risk differentiation to alternative approaches the 
agencies considered that incorporate more indicators, including the 
Altman Z Score approach.\29\ The agencies note that because the three-
indicator methodology uses point in time financial information, results 
using the three indicator methodology could be cyclical.
---------------------------------------------------------------------------

    \29\ The Altman Z Score and subsequently developed variants use 
multiple corporate income and balance sheet values, including market 
value of equity, to predict default probability for a specific 
corporation.
---------------------------------------------------------------------------

    Because the universe of public companies is significantly greater 
than the universe of entities that have issued public debt or that 
themselves are rated by the credit rating agencies, the three 
indicators are expected to cover more firms than an approach that 
relies on credit ratings. The agencies propose to permit banks to use 
the three indicator- methodology only for public-traded companies 
because private companies do not have the market data which is a 
critical input for this methodology.
    The agencies are proposing that the three measures would be used to 
separate debt positions that are exposures to public companies that are 
not financial institutions into three risk buckets that roughly 
approximate credit ratings of AAA to A, BBB to BB, and below BB. The 
limited granularity proposed under this methodology is intended to 
address limitations in the ability of the methodology to distinguish 
among high investment grade ratings and possible misspecification of 
risks between investment grade and non-investment grade ratings of 
``BBB'' and ``BB.''
    Question 7: What operational challenges, if any, would banks face 
in implementing the three-indicator methodology?
    Question 8: How well does this methodology capture credit risk for 
purposes of assigning risk-based capital requirements for covered debt 
positions of publicly-traded companies that are not financial 
institutions? How could it be improved? Financial institution debt 
positions
    The agencies evaluated a number of alternatives to credit ratings 
for assigning specific risk-weighting factors to debt positions that 
are exposures to financial institutions. These alternatives include a 
multi-indicator methodology similar to the methodology proposed for 
public companies that are not financial institutions, a bond credit 
spread methodology described further below, and a methodology based on 
a notice of proposed rulemaking \30\ and related guidance \31\ issued 
by the OCC on November 29, 2011 (collectively, OCC NPR), to revise the 
definition of ``investment grade'' as it is used in the OCC's 
investment securities regulations.
---------------------------------------------------------------------------

    \30\ 76 FR 73526 (Nov. 29, 2011).
    \31\ 76 FR 73777 (Nov. 29, 2011).
---------------------------------------------------------------------------

    Each of these alternatives was viewed as either having significant 
drawbacks or as not being sufficiently developed to propose them within 
this NPR. In evaluating whether to propose a multi-indicator 
methodology to distinguish risk for financial institutions, the 
agencies note that many financial ratios (such as debt-to-equity) vary 
significantly among financial industry sub-sectors, such as insurance 
companies, brokerage firms, and finance companies. Therefore, a ratio-
based methodology for all financial institutions might not be feasible 
for comparing relative risk.
    Given the concerns above, the agencies are proposing that all 
corporate debt positions issued by financial institutions be assigned a 
specific risk-weighting factor of 8.0 percent. The agencies intend to 
continue working to develop and evaluate alternative methodologies to 
the use of credit ratings for financial institution debt positions.
Alternative Approach--Bond Spreads
    The agencies considered using bond spreads as an alternative to 
using credit ratings for assigning capital requirements to both 
financial and non-financial corporate debt positions. Similar to the 
three-indicator methodology, an approach that uses bond credit spreads 
would be market-based and forward-looking. Unlike the three-indicator 
approach, however, a bond spread approach could be particularly useful 
for assigning specific risk-weighting factors to financial institutions 
since, as noted earlier, many

[[Page 79392]]

financial ratios (such as debt-to-equity) vary significantly between 
financial industry sub-sectors, and therefore are not necessarily 
useful for comparing relative risk. However, because bond markets can 
sometimes misprice risk and reflect factors other than credit risk, the 
specific risk-weighting factors determined by this approach may not 
always be reliable. Additionally, because bond spreads can vary a great 
deal over short time periods, this approach may introduce undue 
volatility into the risk-based capital requirements.
    To implement a bond spread-based approach, the agencies could 
assign corporate debt positions to the same general categories of 
``high risk,'' ``medium risk,'' or ``low risk,'' depending on whether 
the spread on the particular position is priced above or below certain 
market-based thresholds. Specifically, one could compare the one-year 
average of the spreads of a financial institution's closest to five-
year, senior unsecured bond, to the one-year averages of two credit 
default swap indices, such as the five year CDX.NA.IG.FIN index \32\ 
and the five-year CDX.NA.HY.B index.\33\ This methodology could 
mitigate some of the concerns mentioned above, by explicitly evaluating 
risk on a relative basis and smoothing volatility by using one-year 
averages.
---------------------------------------------------------------------------

    \32\ The Markit CDX North American Investment Grade Financial 
index is a sub index of the Markit CDX North American Investment 
Grade index. The number of index constituents varies based upon the 
number of financial constituents in the parent index.
    \33\ The Markit CDX North American High Yield B index is a sub 
index of the Markit CDX North American High Yield index. The number 
of index constituents varies based upon the number of B rated 
constituents in the parent index.
---------------------------------------------------------------------------

    Specific risk-weighing factors could then be assigned to corporate 
debt positions that are exposures to public companies that are 
financial institutions as shown in Table 12:

 Table 12--Specific Risk-Weighting Factors Using Corporate Bond Spreads
------------------------------------------------------------------------
                                                       Possible specific
                                                        risk-weighting
                               Risk characterization      factor  (in
                                                           percent)
------------------------------------------------------------------------
average spread <               ``low risk''.........                 4.0
 CDX.NA.IG.FIN.
CDX.NA.IG.FIN <= average       ``medium risk''......                 8.0
 spread < CDX.NA.HY.B.
average spread >= CDX.NA.HY.B  ``high risk''........                12.0
------------------------------------------------------------------------

    Specific risk-weighting factors could be assigned to corporate debt 
positions that are exposures to public companies that are not financial 
institutions as follows:

 Table 12A--Specific Risk-Weighting Factors Using Corporate Bond Spreads
------------------------------------------------------------------------
                                                       Possible specific
                               Risk characterization   risk weight  (in
                                                           percent)
------------------------------------------------------------------------
average spread < CDX.NA.IG     ``low risk''.........                 4.0
 \34\.
CDX.IG <= average spread <     ``medium risk''......                 8.0
 CDX.NA.HY.B.
average spread >= CDX.NA.HY.B  ``high risk''........                12.0
------------------------------------------------------------------------

    The agencies believe that the ``low risk'' characterization would 
roughly correspond to a AAA-A rating, ``medium risk'' would roughly 
correspond to a BBB-BB rating, and ``high risk'' would correspond to a 
B rating or below, respectively.
---------------------------------------------------------------------------

    \34\ The Markit CDX North American Investment Grade index is 
composed of one hundred twenty five (125) investment grade entities 
domiciled in North America, distributed among five (5) sub-sectors. 
Each reference entity is given approximately equal weighting, and 
index constituents are periodically updated using a rules-based 
approach accounting for liquidity, outstanding debt and rating.
---------------------------------------------------------------------------

    Question 9: How does this market-based alternative to credit 
ratings compare to the proposed approaches regarding operational 
feasibility and reliability in assessing risk and an appropriate amount 
of capital?
    Question 10: For what types of positions would the bond spread 
approach be most appropriate, and for what types of positions would it 
not be appropriate? Are there measures of market liquidity or other 
factors that the agencies should consider in evaluating the 
applicability of a credit spread approach?

Alternative Approach--Distinction Based on Proposed Revised 
``Investment Grade'' Definition for National Banks

    The agencies also are considering whether to permit banks to 
determine a specific risk-weighting factor for corporate debt positions 
based on whether the position is ``investment grade,'' as that term is 
defined in the OCC's regulations at 12 CFR 1.2(d). Under such an 
approach, an investment grade exposure might be assigned a risk-
weighting factor of 6.0 percent and a non-investment grade exposure 
might be assigned a risk-weighting factor of 12.0 percent.
    The OCC's investment securities regulations generally require a 
bank to determine whether or not a security is ``investment grade'' in 
order to determine whether purchasing the security is permissible. The 
OCC's investment securities regulations at 12 CFR part 1 use credit 
ratings as a factor for determining the credit quality, marketability, 
and appropriate concentration levels of investment securities purchased 
and held by national banks. Under the OCC rules, an investment security 
must not be ``predominantly speculative in nature.'' The OCC rules 
provide that an obligation is not ``predominantly speculative in 
nature'' if it is rated investment grade or, if unrated, it is the 
credit equivalent of investment grade. ``Investment grade,'' in turn, 
is defined as a security rated in one of the four highest rating 
categories by two or more national recognized statistical rating 
organization (NRSROs)--or one NRSRO

[[Page 79393]]

if the security has been rated by only one NRSRO.\35\
---------------------------------------------------------------------------

    \35\ An NRSRO is a credit rating agency registered with the U.S. 
Securities and Exchange Commission.
---------------------------------------------------------------------------

    Under the OCC's recently proposed revisions to its investment 
securities regulations, a security would be ``investment grade'' if the 
issuer of the security has an adequate capacity to meet financial 
commitments under the security for the projected life of the 
security.\36\ The ``adequate capacity to meet financial commitments'' 
standard would replace language in 12 CFR 1.2 which currently 
references NRSRO credit ratings. To meet this new standard, national 
banks would have to determine that the risk of default by the obligor 
is low and the full and timely repayment of principal and interest is 
expected.
---------------------------------------------------------------------------

    \36\ 76 FR 73526 (Nov. 29, 2011).
---------------------------------------------------------------------------

    When determining whether a particular issuer has an adequate 
capacity to meet financial commitments under a security for the 
projected life of the security, the OCC would expect national banks to 
consider a number of factors, to the extent appropriate. These may 
include consideration of internal analyses, third-party research and 
analytics including external credit ratings, internal risk ratings, 
default statistics, and other sources of information as appropriate for 
the particular security. Additionally, when purchasing a corporate debt 
security, a bank would be expected to be able to confirm that the 
credit spread to U.S. Treasuries is consistent with bonds of similar 
credit quality; confirm that the risk of default is low and consistent 
with bonds of similar credit quality; and show that it understands 
local demographics and economics relevant to the performance of the 
obligor.
    While external credit ratings and assessments would remain a 
valuable source of information and provide national banks with a 
standardized credit risk indicator, banks would have to supplement the 
credit ratings with due diligence processes and analyses that are 
appropriate for the bank's risk profile and for the amount and 
complexity of the debt instrument. Therefore, it would be possible that 
a security rated in the top four rating categories by a credit rating 
agency may not satisfy the proposed revised investment grade standard.
    The agencies believe such an approach would be consistent with 
current practices and therefore relatively simple for banks to 
implement. Additionally, banks would be able to apply it to corporate 
debt securities issued by both financial and non-financial 
institutions. However, this approach has limited granularity.
    Question 11: What are the pros and cons of a more simple approach, 
which distinguishes only among investment grade and non-investment 
grade corporate debt positions relative to the more granular three-
indicator methodology? What are the pros and cons of offering the 
investment grade/non-investment grade (under the OCC's proposed 
revisions to 12 CFR part 1) approach as an alternative for banks that 
do not use the three-indicator approach?
7. Securitization Positions
    Under the current market risk capital rules, if a bank does not 
model specific risk, it must calculate a specific risk capital add-on 
for each securitization position subject to the rule using a 
standardized method. Under the standardized method, a bank must 
multiply the absolute value of the current market value of each net 
long and net short position in a securitization position by the 
appropriate specific risk-weighting factor specified in the rule. These 
specific risk-weighting factors range from zero to 8.0 percent and are 
based on the credit rating and remaining contractual maturity of the 
position. In addition, banks must apply the highest specific risk-
weighting factor (8.0 percent) to unrated securitization positions.
    Under the 2009 revisions and the January 2011 NPR, a bank is no 
longer permitted to model specific risk for securitization positions, 
including re-securitization positions, with the exception of certain 
correlation trading positions. Instead, the bank must use the specific 
risk-weighting factors based on credit ratings, as shown in Tables 13 
and 14 below.

   Table 13--Long-Term Credit Rating Specific Risk-Weighting Factors for Securitization Positions in the Basel
                                              Market Risk Framework
----------------------------------------------------------------------------------------------------------------
                                                                            Securitization
                                                                           exposure (that is
                                                                               not a re-       Re-securitization
                                                                            securitization     exposure specific
      Illustrative external rating description              Example       exposure) specific    risk-weighting
                                                                            risk-weighting        factor  (in
                                                                              factor  (in          percent)
                                                                               percent)
----------------------------------------------------------------------------------------------------------------
Highest investment grade rating.....................                 AAA                1.60                3.20
Second-highest investment grade rating..............                  AA                1.60                3.20
Third-highest investment grade rating...............                   A                4.00                8.00
Lowest investment grade rating......................                 BBB                8.00               18.00
One category below investment grade.................                  BB               28.00               52.00
Two categories below investment grade...............                   B              100.00              100.00
Three categories or more below investment grade.....                 CCC              100.00              100.00
----------------------------------------------------------------------------------------------------------------


  Table 14--Short-Term Credit Rating Specific Risk-Weighting Factors for Securitization Positions in the Basel
                                              Market Risk Framework
----------------------------------------------------------------------------------------------------------------
                                                                            Securitization
                                                                           exposure (that is
                                                                               not a re-       Re-securitization
                                                                            securitization     exposure specific
      Illustrative external rating description              Example       exposure) specific    risk-weighting
                                                                            risk-weighting        factor  (in
                                                                              factor  (in          percent)
                                                                               percent)
----------------------------------------------------------------------------------------------------------------
Highest investment grade rating.....................             A-1/P-1                1.60                3.20
Second-highest investment grade rating..............             A-2/P-2                4.00                8.00

[[Page 79394]]

 
Third-highest investment grade rating...............             A-3/P-3                8.00               18.00
All other ratings...................................                 N/A              100.00              100.00
----------------------------------------------------------------------------------------------------------------

    In this proposal, a securitization generally means a transaction in 
which (1) all or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties; (2) the credit 
risk associated with the underlying exposures has been separated into 
at least two tranches that reflect different levels of seniority; (3) 
performance of the securitization position depends upon the performance 
of the underlying exposures; (4) all or substantially all of the 
underlying exposures are financial exposures (such as loans, 
commitments, credit derivatives, guarantees, receivables, asset-backed 
securities, mortgage-backed securities, other debt securities, or 
equity securities); (5) for non-synthetic securitizations, the 
underlying exposures are not owned by an operating company; (6) the 
underlying exposures are not owned by a small business investment 
company described in section 302 of the Small Business Investment Act 
of 1958 (15 U.S.C. 682); and (7) the underlying exposures are not owned 
by a firm, an investment in which qualifies as a community development 
investment under 12 U.S.C. 24 (Eleventh). A re-securitization means a 
securitization in which one or more of the underlying exposures is a 
securitization position. Securitization position means a covered 
position that is an on-balance sheet or off-balance sheet credit 
exposure (including credit-enhancing representations and warranties) 
that arises from a securitization (including a re-securitization); or 
an exposure that directly or indirectly references a securitization 
exposure. A re-securitization position means a covered position that is 
an on- or off-balance sheet exposure to a re-securitization; or an 
exposure that directly or indirectly references a re-securitization 
exposure.
    Under the proposed rule, the agencies have developed a simplified 
version of the Basel II advanced approaches supervisory formula 
approach (SFA) to assign specific risk-weighting factors to 
securitization positions including re-securitization positions. In this 
proposal, the simplified version is referred to as the simplified 
supervisory formula approach (SSFA). If a bank cannot, or chooses not 
to, use the SSFA, a securitization position would be subject to a 
specific risk-weighting factor of 100 percent, which is roughly the 
equivalent of a 1,250 percent risk weight.
    Similar to the SFA, the SSFA is based on the capital requirements 
that would be applied to all exposures underlying a securitization.\37\ 
A bank would need several inputs to calculate the SSFA. The first input 
is the weighted-average capital requirement under the general risk-
based capital rules that would be assigned to the underlying exposures, 
if those exposures were held directly by the bank. The second and third 
inputs indicate the position's level of subordination and relative size 
within the securitization. The fourth input is the level of losses 
actually experienced on the underlying exposures.
---------------------------------------------------------------------------

    \37\ When using the SFA, a bank must meet minimum requirements 
under the Basel internal ratings-based approach to estimate 
probability of default and loss given default for the underlying 
exposures. Under the U.S. risk-based capital rules, the SFA is 
available only to banks that have been approved to use the advanced 
approaches.
---------------------------------------------------------------------------

    The SSFA is designed to apply relatively higher capital 
requirements to the more risky junior tranches of a securitization that 
are the first to absorb losses and relatively lower requirements to the 
most senior positions. The SSFA applies a 100 percent specific risk-
weighting factor (roughly equivalent to a 1,250 percent risk weight) to 
securitization positions that absorb losses up to the amount of capital 
that would be required for the underlying exposures under the agencies' 
general risk-based capital rules had those exposures been held directly 
by a bank. For example, assume a securitization position that is backed 
by a $100 pool of auto loans is subject to a 100 percent risk weight 
under the agencies' general risk-based capital rules. Application of a 
100 percent risk weight to the $100 pool of loans would result in a 
total risk-based capital requirement of $8. Therefore, under the SSFA, 
securitization positions that would absorb up to the first $8 of loss 
in the securitization would be assigned a specific risk-weighting 
factor of 100 percent. For the remaining securitization tranches in 
this example that absorb losses beyond the first $8, the SSFA would 
apply capital requirements that would decrease as the seniority of the 
positions increases, subject to the supervisory floor, as described 
below.
    Apart from the floor and other supervisory adjustments, the SSFA 
attempts to be as consistent as possible with the general risk-based 
capital rules that would apply if the underlying exposures were held 
directly by a bank. At the inception of a securitization, the SSFA 
would require more capital on a transaction-wide basis than would be 
required if the pool of assets had not been securitized. That is, if 
the bank held every tranche of a securitization, its overall capital 
charge would be greater than if the bank held the underlying assets in 
portfolios. The agencies believe that this effect would reduce the 
ability of banks to engage in regulatory capital arbitrage through the 
use of securitization. However, as discussed in more detail below, the 
agencies are seeking comment on whether it would be appropriate to make 
other adjustments to the SSFA that would either increase or decrease 
the overall capital requirements that would be produced using the SSFA.
    Under the proposed rule, the SSFA specific risk-weighting factor 
for a position depends on the following inputs:
    (i) KG is the weighted-average capital requirement of 
the underlying exposures calculated using the agencies' general risk-
based capital rules.
    (ii) Parameter A is the attachment point of the position. This 
represents the threshold at which credit losses would first be 
allocated to the position. This input is the ratio, expressed as a 
decimal value between zero and one, of the dollar amount of the 
securitization positions that are subordinated to the position to the 
dollar amount of the entire pool of underlying assets.

[[Page 79395]]

    (iii) Parameter D is the detachment point of the position. This 
represents the threshold at which credit losses allocated to the 
position would result in a total loss to the investor in the position. 
This input, which is a decimal value between zero and one, equals the 
value of Parameter A plus the ratio of (1) the dollar amount of the 
positions and all pari passu positions to (2) the dollar amount of the 
underlying exposures.
    (iv) A supervisory calibration parameter, p. For securitization 
positions that are not re-securitization positions, this input is 0.5; 
for re-securitization positions, it is 1.5.
    (v) Cumulative losses on the underlying pool of exposures, which 
affects the level of the specific risk-weighting factor floor, as 
discussed below.
    A bank may use the SSFA to determine its specific risk-weighting 
factor for a securitization position only if it has information to 
assign each of the parameters for the position. In particular, if the 
bank does not know KG for a position because it lacks the 
necessary information on the underlying exposures, the bank may not use 
the SSFA to determine its specific risk-weighting factor. Rather, the 
bank must apply a specific risk-weighting factor of 100 percent. The 
agencies believe that for most securitizations, the inputs to the SSFA 
are readily available from prospectuses for newly-issued 
securitizations and from servicer reports for existing securitizations.
    The SSFA specific risk-weighting factor for the portion of a 
securitization position not subject to the 100 percent specific risk-
weighting factor applied to the junior-most portion of the transaction 
is:

SSFA Formula
[GRAPHIC] [TIFF OMITTED] TP21DE11.072

Where,
[GRAPHIC] [TIFF OMITTED] TP21DE11.073

(the base of the natural logarithms) is equal to the greater of:

    (i) KSSFA multiplied by 100 and expressed as a percent; 
or
    (ii) The supervisory minimum specific risk-weighting factor 
assigned to the tranche based on cumulative losses (see Table 15)
    The agencies are proposing to apply a specific risk-weight factor 
floor that will increase as cumulative losses on the pool increase over 
time (see Table 15). This feature will enhance the risk sensitivity of 
the capital requirements for securitization positions by increasing the 
capital requirements for securitization exposures--particularly more 
senior tranches--as underlying pool quality exhibits credit 
deterioration. Under the agencies' current market risk capital rules, 
many senior securitization positions require limited amounts of 
capital, even if their external ratings are substantially downgraded. 
During the crisis, a number of highly rated senior securitization 
positions were subject to significant downgrades and suffered 
substantial losses. As indicated in the January 2011 NPR, the agencies 
are seeking to ensure that sufficient capital is held against such 
positions and that the amount of required capital is consistent with 
international agreements.

 Table 15--Supervisory Minimum Specific Risk-Weighting Factor Floors for
                        Securitization Exposures
------------------------------------------------------------------------
  Cumulative losses of principal on originally
     issued securities as a percent of KG at          Specific risk-
                   origination                     weighting factor  (in
-------------------------------------------------        percent)
     Greater than:        Less than or equal to:
------------------------------------------------------------------------
                0                       50                      1.6
               50                      100                      8.0
              100                      150                     52.0
              150                      n/a                    100.0
------------------------------------------------------------------------

    For example, if cumulative losses on a securitized residential 
mortgage pool, where the general risk-based capital requirement is 4 
percent, rose to 3 percent (or 75 percent of the capital requirement on 
the underlying asset pool), the minimum specific risk-weighting factor 
would increase from 1.6 percent to 8.0 percent in accordance with table 
15 above.
SSFA Example
    To illustrate the specific risk-weighting factors produced by the 
SSFA, assume a hypothetical residential mortgage-backed securitization 
composed of four tranches: a senior-most tranches (S) and three junior 
tranches (M1, M2, and M3). Further assume that KG is 4.0 
percent (based on the 50 percent risk weight applied to prudently 
underwritten residential mortgages in the agencies' general risk-based 
capital framework). Table 16 shows the original balance, attachment 
point, detachment point, and SSFA specific risk-weighting factor for 
each tranche.

                 Table 16--Example of a Hypothetical Residential Mortgage-Backed Securitization
----------------------------------------------------------------------------------------------------------------
                                                                                             SSFA specific risk-
            Tranche                Current balance    Attachment point    Detachment point     weighting factor
                                         ($)            (in percent)        (in percent)         (in percent)
----------------------------------------------------------------------------------------------------------------
S..............................       1,988,831,790               10.00              100.00                  1.6
M1.............................          88,392,524                6.00               10.00                 15.9
M2.............................          44,196,262                4.00                6.00                 63.2
M3.............................          88,392,524                0.00                4.00                100
----------------------------------------------------------------------------------------------------------------

    To illustrate the effect of the SSFA on the specific risk-weighting 
factor as cumulative losses on the underlying exposures rise from a 
significant deterioration in credit quality, the following chart 
assumes that cumulative losses are equal to $121,539,720 (or 5.50 
percent of the original balance). This represents cumulative losses 
that are approximately 137 percent of the original amount of capital 
that would be required to be held against the underlying exposures at 
origination as they were held directly by a bank (KG). As 
such, the minimum supervisory specific risk-weighting factor increases 
from 1.6 percent to 52 percent. Tranche M3 is reduced to $0 as it 
absorbs losses in the amount of its principal balance. Similarly, 
tranche M2 reduces in size from $44,196,262 to $11,049,066 as it

[[Page 79396]]

absorbs the losses not absorbed by tranche M3.

----------------------------------------------------------------------------------------------------------------
                                                                                              SSFA specific risk-
             Tranche                Current balance    Attachment point    Detachment point    weighting factor
                                          ($)            (in percent)        (in percent)        (in percent)
----------------------------------------------------------------------------------------------------------------
S...............................       1,988,831,790               4.76%              100.00                  52
M1..............................          88,392,524                0.53                4.76                  97
M2..............................          11,049,066                0.00                0.53                 100
M3..............................  ..................                0.00                0.00  ..................
----------------------------------------------------------------------------------------------------------------

Specific Risk-Weighting Factors for Non-Modeled Securitization 
Positions and Modeled Correlation Trading Positions
    The proposed rule specifies the following treatment for the 
determination of the total specific risk add-on for a portfolio of 
modeled correlation trading positions and for non-modeled 
securitization positions. For purposes of a bank calculating its 
comprehensive risk measure with respect to either the surcharge or 
floor calculation for a portfolio of correlation trading positions 
modeled under section 9 of the January 2011 NPR, the total specific 
risk add-on would be the greater of: (1) The sum of the bank's specific 
risk add-ons for each net long correlation trading position calculated 
using the standardized measurement method; or (2) the sum of the bank's 
specific risk add-ons for each net short correlation trading position 
calculated using the standardized measurement method.
    For a bank's securitization positions that are not correlation 
trading positions and for securitization positions that are correlation 
trading positions not modeled under section 9 of the January 2011 NPR, 
the total specific risk add-on would be the greater of: (1) The sum of 
the bank's specific risk add-ons for each net long securitization 
position calculated using the standardized measurement method; or (2) 
the sum of the bank's specific risk add-ons for each net short 
securitization position calculated using the standardized measurement 
method.
    This treatment is consistent with the BCBS's revisions to the 
market risk framework. With respect to securitization positions that 
are not correlation trading positions, the BCBS's June 2010 revisions 
provided a transitional period for this treatment. Thus, the agencies 
anticipate potential reconsideration of this provision at a future 
date.
Alternative Calibrations
    Under certain circumstances, the SSFA may produce a specific risk-
weighting factor for a securitization position that exceeds the 
specific risk-weighting factor that would otherwise be generated by the 
Basel market risk framework's ratings-based approach. For example, 
certain junior and mezzanine tranches of residential mortgage, credit 
card, or automobile loan securitization positions may attract a 100 
percent specific risk-weighting factor under the SSFA while, depending 
upon the tranches' credit ratings, the ratings-based approach could 
assign significantly lower capital requirements. This occurs because 
the SSFA relies on: (1) The risk weight that would be assigned to the 
underlying exposures under the general risk-based capital rules, were 
the exposures held on the bank's balance sheet; and, (2) the particular 
position's attachment and detachment points. The SSFA does not take 
into consideration many forms of credit enhancements, such as excess 
spread, that may be recognized by credit rating agencies when assigning 
credit ratings. As such, the SSFA will result in a 100 percent specific 
risk-weighting factor for all securitization positions that detach at 
or below KG.
    To better align the specific risk-weighting factors generated by 
the SSFA with those from the ratings-based approach, the agencies could 
alter certain parameters in the SSFA. For example, for an automobile 
securitization, the risk weight generally applicable to the underlying 
exposures is 100 percent. Therefore, the SSFA assigns a 100 percent 
specific risk-weighting factor to securitization positions that detach 
at or below an 8 percent KG. However, many automobile 
securitizations include credit enhancements, such as 
overcollateralization, and excess spread that would not be recognized 
under the SSFA.
    To adjust for the lack of recognition of certain forms of credit 
enhancement, the agencies could introduce a scaling factor to adjust 
the SSFA based on the type or quality of assets underlying a 
securitization. The introduction of such a scaling factor could reduce 
the overall impact of the 100 percent specific risk-weighting factors 
for securitization positions that detach at or below an 8 percent 
KG. For example, the agencies could scale KG by 
50 percent so that the 100 percent specific risk-weighting factor for 
such positions would be applied to the first 4 percent (0.5 * 8 percent 
= 4 percent) of the securitization structure rather than the 8 percent 
value in the example above.
    More generally, establishing and adjusting the scaling factor would 
affect the overall amount of capital required by the SSFA on a 
transaction-wide basis across the tranches of a securitization. Lower 
values would correspond to a lower aggregate capital requirement and 
higher values to a higher aggregate requirement.
    Question 12: Is the SSFA function appropriately calibrated and 
would it be a feasible and appropriate methodology for assigning 
specific risk add-ons for securitization positions? Why or why not? Are 
the minimum risk-weighting factors appropriate and appropriately 
calibrated? Why or why not? Please provide detailed responses and 
supporting data wherever possible.
    Question 13: What are the benefits and drawbacks to using a scaling 
factor to better align the minimum capital requirements under the SSFA 
with those generated by the ratings-based approach? What other 
adjustments could the agencies consider to better recognize credit 
enhancements and align the minimum capital requirements? Please provide 
specific details on the mechanics of, and rationale for, any suggested 
methodology and the position types to which it should apply. How should 
an adjustment, such as a scaling factor, be implemented? For example, 
should it take into account the type of credit enhancement, asset 
class, loss experience, prudential requirements, or other criteria, and 
if so how and why?
Alternative Using a Concentration Ratio
    The 2009 revisions incorporate several alternatives for assigning 
specific risk-weighting factors to unrated securitization positions. 
For example, for securitization positions that do not meet the 
requirements for

[[Page 79397]]

the Basel market risk framework's ratings-based approach, a bank may 
set the specific risk add-on for the securitization position equal to 
the absolute value of the market value of the effective notional amount 
of each net long or net short securitization position in the portfolio 
multiplied by 8 percent of the dollar-weighted average risk weight 
applicable to the underlying exposures and by a concentration ratio. 
The concentration ratio equals the sum of the notional amounts of all 
tranches in the securitization divided by the sum of the notional 
amounts of the tranches junior to or pari passu with the tranche in 
which the position is held, including the amount of that tranche 
itself. If the concentration ratio is 12.5 or higher, the bank would 
have to apply a specific risk-weighting factor of 100 percent to the 
securitization position.
    The agencies are considering whether to use the concentration ratio 
in place of, or as a complement to, the SSFA. Like the SSFA, the 
concentration ratio relies on the calculation of the dollar-weighted 
average risk weight applicable to the underlying exposures in a 
securitization position. As such, the agencies believe that the 
specific risk-weighting factor for securitization positions could be 
easily calculated using the concentration ratio.
    Question 14: What are the pros and cons of incorporating the 
concentration ratio into the market risk capital rules as a replacement 
or alternative to the SSFA?
    Question 15: In what instances and for what types of securitization 
positions should the concentration ratio be used? For what types of 
securitization positions does the concentration ratio produce a 
specific risk-weighting factor that is better aligned with the risk 
inherent in the position than the SSFA?
Alternative Using a Credit Spread Approach
    Another alternative for determining the specific risk-weighting 
factor for a securitization could include the use of market data. Such 
a methodology could set and adjust the specific risk-weighting factor 
of a securitization position based on the spread between the rate of 
the position and the rate on a U.S. Treasury obligation of similar 
maturity and the movements of an index of securities. This methodology 
would be designed to adjust specific risk-weighting factors based on 
changes in the risk characteristics of the individual securitization 
position relative to changes in the broader market. This methodology 
would recognizes that when assessing the riskiness of a position 
relative to a benchmark, a change in the spread of a securitization 
position should be interpreted differently when comparable market 
spreads remain stable or when they exhibit volatility.
    A credit spread approach could be based on a scoring model driven 
by three variables: (1) The spread of the securitization position over 
U.S. Treasuries of comparable maturity; (2) the spread of a high-yield 
index of corporate exposures (e.g., CDX.HY.B \38\), which captures 
business cycle conditions; and (3) the maturity of the securitization. 
The methodology could assign a score on the basis of the following 
formula:
---------------------------------------------------------------------------

    \38\ The CDX.HY.B index is comprised of high-yield credit 
default swaps that have reference assets rated approximately ``B'' 
by external credit rating agencies.
[GRAPHIC] [TIFF OMITTED] TP21DE11.074

    (1) The natural logarithm of the quarterly moving average of the 
securitization spread over U.S. Treasuries with comparable 
maturity,\39\ (2) the natural logarithm of the median spread on 
securities included in the CDX.HY.B index over the prior five business 
days, and (3) the natural logarithm of the maturity of the 
securitization exposure, expressed in fractions of a year. The specific 
risk-weighting factor would be assigned on the basis of Table 17 below.
---------------------------------------------------------------------------

    \39\ The excess spread over U.S. Treasuries is appropriate for 
fully funded/collateralized securitizations. In other cases, the 
variable sp should be derived from the securitization spread and the 
level of collateralization which would be a proxy for the unfunded 
spread.

  Table 17--Alternative Approach Based on Credit Spreads for Assigning
       Specific Risk-Weighting Factors to Securitization Positions
------------------------------------------------------------------------
                        Score is
--------------------------------------------------------- Specific risk-
                                               Greater       weighting
             Less than                 and     than or    factor is  (in
                                               equal to      percent)
------------------------------------------------------------------------
0.203..............................                  N/A            1.6
0.741..............................                0.203            2.0
3.003..............................                0.741            2.8
5.870..............................                3.003            6.0
9.000..............................                5.870           34.0
N/A................................                9.000          100.0
------------------------------------------------------------------------

    To construct this methodology, three types of securitization 
exposures (automobiles, credit cards, and equipment) were examined, and 
the approach was also tested on securitizations backed by other asset 
classes, including commercial mortgage backed securities and 
residential mortgage backed securities. This analysis was conducted 
using different time periods, including before and after the 2008 
financial crisis. The analysis indicated that this alternative could 
yield a reasonable level of credit risk differentiation. However, the 
agencies chose not to propose this approach in this NPR due to concerns 
that reliable spread data on many securitization positions would not be 
readily available. As is the case with other spread-based approaches, 
the agencies recognize that securitization spreads may be affected by 
factors other than credit risk, such as illiquidity.
    Question 16: Is the spread-based methodology feasible for assigning 
securitization positions to specific risk-weighting factors? What are 
the particular types of securitization positions for which it is more 
or less feasible, and why?
    Question 17: Would this alternative be more or less effective as a 
methodology for assigning specific risk-weighting factors for 
securitization positions than the proposed methodology using the SSFA? 
What difficulties or challenges would a bank have in assigning specific

[[Page 79398]]

risk-weighting factors for securitization positions under this 
approach?
    Question 18: What limitations currently exist with respect to 
banks' ability to obtain reliable spread data for securitization 
positions, including illiquid positions? If this method is implemented, 
how could banks demonstrate to supervisors sufficient access to such 
information to use the methodology?
Alternative Using a Third-Party Vendor Approach
    The agencies also considered the approach used by the National 
Association of Insurance Commissioners for determining the regulatory 
capital requirements for certain securitization positions held by 
insurance companies. Under such an approach, the agencies would retain 
one or more third-party vendors to assign risk-based capital 
requirements for securitization positions. Working with the third-party 
vendor(s), the agencies would develop a rating system that would 
evaluate individual securitization positions based on expected loss or 
probability of default. Each securitization position could be evaluated 
on a quarterly or annual basis, and could be evaluated more frequently 
as appropriate, such as when economic conditions or other factors that 
could affect the performance of the underlying exposures or tranche 
changed.
    The agencies are concerned that the employment of third-party 
vendors would have some of the same drawbacks as relying on credit 
rating agencies. Specifically, the agencies have concerns regarding the 
use of internal models; the limited number of vendors that possess the 
expertise and resources necessary to determine an appropriate rating 
for securitization positions; the potential for overreliance on third-
party ratings; and the potential conflicts of interest where a vendor 
retained by the agencies remains engaged in the business of evaluating 
securitization positions for other clients.
    Question 19: Given concerns noted above, what would be the 
advantages and disadvantages of such an approach, particularly relative 
to the proposed SSFA approach?
Alternative Permitting the SFA for Advanced Approaches Banks
    Both the Basel II standardized and advanced approaches 
securitization frameworks use a hierarchy of approaches for measuring 
risk-based capital requirements for securitization exposures. Under the 
hierarchy of approaches, a bank must use an credit rating from an 
external credit assessment institution (ECAI), when available. The 2009 
revisions allow a bank that has been approved to use the Basel II 
internal-ratings based approach (IRB) to apply the SFA. However, the 
Basel II Accord permits use of the SFA only for unrated securitization 
positions.
    The agencies propose to adopt the SSFA for use by all banks subject 
to the market risk capital rules. That is, the SFA would not be an 
option available to advanced approaches banks within the market risk 
capital rules. The agencies expect that banks should be able to 
calculate the SSFA. Given concern about potential arbitrage 
opportunities that would be created if advanced approaches banks were 
allowed the option to use either the SSFA or the SFA to calculate 
specific risk capital requirements for their securitization positions, 
the agencies propose to permit advanced approaches banks to use only 
the SSFA for purposes of calculating the specific risk-weighting 
factors for their securitization positions.
    Question 20: Should banks that are approved to use the advanced 
approaches be allowed to use the advanced approaches SFA to calculate 
specific risk-weighting factors for their securitization positions 
under the market risk capital rules? If the advanced approaches banks 
are permitted to use SFA, what safeguards should be put in place to 
mitigate arbitrage concern?
    If the agencies were to allow the use of the SFA for assigning 
specific risk-weighting factors, the agencies would also consider 
modifications to the SFA to make it more risk-sensitive and more 
usable.
    Under the advanced approaches rule, banks are allowed to use the 
SFA to calculate regulatory capital requirements for securitization 
positions if certain conditions are met.\40\ The SFA requires banks to 
use exposure-specific inputs, including the capital requirement of the 
underlying exposures calculated under the agencies' advanced approaches 
rule as if the assets were held directly on a bank's balance sheet. The 
SFA was designed to allow banks to calculate capital requirements on 
unrated securitization positions that were originated by the banks 
holding the exposures. During the ANPR comment period and subsequent 
interaction with the industry, members of the industry indicated that 
banks generally do not possess the information necessary to assign a 
probability of default and loss given default, and hence calculate a 
capital requirement, for individual wholesale exposures or segments of 
retail exposures where the underlying securitized positions were not 
originated by the bank. The commenters proposed that the agencies could 
modify the methodology for calculating SFA inputs by allowing banks to 
incorporate pool-level estimates of PD and LGD. To increase risk 
sensitivity of the approach, pool-level inputs could be used on a 
quarterly basis.
---------------------------------------------------------------------------

    \40\ See 12 CFR part 3, Appendix C section 45 (OCC); 12 CFR part 
208, Appendix F, section 45 and 12 CFR part 225, Appendix G, section 
45 (Board); 12 CFR part 325, Appendix D, section 45 (FDIC).
---------------------------------------------------------------------------

    Although the SFA recognizes credit enhancement provided by funded 
subordinated positions in a securitization, it does not recognize as a 
form of credit enhancement additional cash flows available to a 
securitization from payment of principal and interest. One commenter 
indicated that the inability to recognize additional cash flows 
understates the credit enhancement available to certain 
securitizations, especially automobile and credit card securitizations. 
Furthermore, this could create competitive issues for U.S. banks in 
comparison to foreign banks that use the ratings-based approach and 
internal assessment approach, which may recognize the impact of 
additional cash flows. In order to address this issue, the commenter 
proposed allowing the use of cash flow projections to inform the level 
of credit enhancement recognized under the SFA.
    Question 21: How could the SFA be modified to permit the use of 
pool-level inputs to increase the applicability of the SFA for banks as 
investors? What effect would the use of pool-level inputs and the 
recognition of cash flow hedges have on the risk sensitivity of the 
SFA? To what extent does use of pool-level inputs camouflage the risk 
inherent in an asset pool? Are there other issues that should be 
considered if pool-level inputs are used?

Comparing Capital Frameworks Pursuant to Section 171(b) of the Dodd-
Frank Act

    Pursuant to section 171(b) of the Act, the agencies may not 
establish generally applicable minimum risk-based capital requirements 
that are quantitatively lower than the generally applicable risk-based 
capital requirements that were in effect for insured depository 
institutions as of July 21, 2010.
    The market risk capital rules' capital requirements, which were in 
effect on July 21, 2010, are part of the generally applicable risk-
based capital requirements. Therefore, the agencies have considered the 
effect of

[[Page 79399]]

implementing the proposed alternatives to credit ratings under the 
agencies' market risk capital rules.
    The agencies believe that the proposed changes to the market risk 
capital rules would not result in minimum capital requirements that are 
quantitatively lower than the generally applicable requirements for 
insured depository institutions in effect on July 21, 2010. In this 
regard, the agencies note that under this proposal, the specific risk 
capital requirements for debt and securitization positions should 
increase relative to the capital requirements for those positions under 
the existing market risk capital rules as of July 21, 2010.

Regulatory Analysis

Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that, in connection with a notice of proposed 
rulemaking, an agency prepare and make available for public comment an 
initial regulatory flexibility analysis that describes the impact of a 
proposed rule on small entities.\41\ Under regulations issued by the 
Small Business Administration,\42\ a small entity includes a commercial 
bank or bank holding company with assets of $175 million or less (a 
small banking organization). As of June 30, 2011, there were 
approximately 2,450 small bank holding companies, 648 small national 
banks, 499 small state member banks, and 2,554 small state nonmember 
banks.
---------------------------------------------------------------------------

    \41\ See 5 U.S.C. 603(a).
    \42\ See 13 CFR 121.201.
---------------------------------------------------------------------------

    The proposed rule would apply only if the bank holding company or 
bank has aggregated trading assets and trading liabilities equal to 10 
percent or more of quarter-end total assets, or $1 billion or more. No 
small banking organizations satisfy these criteria. Therefore, no small 
entities would be subject to this rule.

OCC Unfunded Mandates Reform Act of 1995 Determination

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (UMRA) requires that an agency prepare a budgetary impact 
statement before promulgating a rule that includes a Federal mandate 
that may result in the expenditure by state, local, and tribal 
governments, in the aggregate, or by the private sector of $100 million 
or more (adjusted annually for inflation) in any one year. If a 
budgetary impact statement is required, section 205 of the UMRA also 
requires an agency to identify and consider a reasonable number of 
regulatory alternatives before promulgating a rule.
    The OCC estimates that the overall cost of the proposed rule in the 
first year of implementation will be approximately $7.4 million. 
Eliminating start-up costs after the first year, we expect the annual 
cost in subsequent years to be roughly half of the start-up costs for 
data acquisition, calculation, and verification. We estimate this 
ongoing cost at approximately $1.3 million.
    The OCC also recognizes that market risk capital requirements are 
likely to change under the proposed rule. The largest capital impact of 
the proposed rule is likely to affect securitizations, corporate debt 
positions, and exposures to sovereigns. The increased risk sensitivity 
of the alternative measures of creditworthiness implies that specific 
risk capital requirements may go down for some trading assets and up 
for others. For those assets with a higher specific risk capital charge 
under the proposed rule, however, that increase is likely to be large, 
in some instances requiring a dollar-for-dollar capital charge.
    At this time the OCC is unable to estimate the capital impact of 
this NPR with precision. While the impact on certain items (for 
example, U.S. Treasury Securities) will be zero, the impact on the 
other asset categories is less clear. For example, the actual impact on 
the specific risk capital requirements for a bank's holdings of 
corporate debt securities will depend on the quality of the assets as 
determined by the measures of creditworthiness set forth in the NPR. 
While the OCC anticipates that this impact may be large, the agency 
lacks the information on the composition and quality of the trading 
portfolio that would allow us to estimate a likely capital charge. The 
actual impact on market risk capital requirements also will depend on 
the extent to which institutions model specific risk.
    For the January 2011 proposal, the OCC derived its estimate of the 
proposal's potential effect on market risk capital requirements using 
the third trading book impact study conducted by the Basel Committee on 
Banking Supervision in 2009 and additional estimates of the capital 
requirement for standardized securitization exposures and correlation 
trading positions.\43\ Based on those assessments, the OCC estimated 
that the market risk capital requirements for national banks would 
increase by approximately $51 billion. These new capital requirements 
would lead banks to deleverage and lose the tax advantage of debt. 
Therefore, the OCC estimated that the loss of these tax benefits would 
be approximately $334 million per year. Because the estimated cost of 
the January 2011 proposal exceeded $100 million annually, the OCC 
prepared a budgetary impact analysis and identified and considered 
alternative approaches.\44\
---------------------------------------------------------------------------

    \43\ The report, ``Analysis of the third trading book impact 
study'', is available at www.bis.org/publ/bcbs163.htm. The study 
gathered data from 43 banks in 10 countries, including six banks 
from the United States.
    \44\ See 76 FR 1908 (January 11, 2011).
---------------------------------------------------------------------------

    Because the OCC expects that the alternative measures of 
creditworthiness set forth in this NPR will produce specific risk 
capital requirements that are comparable to those published by the 
Basel Committee, the OCC does not expect increased market risk capital 
requirements due to this NPR to differ substantially from our previous 
estimate. Thus, the OCC has not included an additional cost of capital 
component in this assessment, and the overall estimate of the cost of 
the proposed rule for national banks is $7.4 million in the first year.
    Because the OCC has determined that its portion of this NPR would 
not result in expenditures by state, local, and tribal governments, or 
by the private sector, of $100 million or more, the OCC has not 
prepared a new budgetary impact statement or specifically addressed any 
new regulatory alternatives.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501-3521), the agencies may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a currently valid Office of 
Management and Budget (OMB) control number. The agencies have reviewed 
the proposed rulemaking and determined that there are no additional PRA 
requirements other than those previously identified in a related 
proposed rulemaking published on January 11, 2011 (76 FR 1890). The 
agencies sought public comment on these PRA requirements as part of the 
January proposed rulemaking and no comments were received on the PRA 
requirements.

Plain Language

    Section 722 of the GLBA required the agencies to use plain language 
in all proposed and final rules published after January 1, 2000. The 
agencies invite comment on how to make this proposed rule easier to 
understand. For example:

[[Page 79400]]

     Have the agencies organized the material to suit your 
needs? If not, how could they present the rule more clearly?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Do the regulations contain technical language or jargon 
that is not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes would achieve that?
     Is this section format adequate? If not, which of the 
sections should be changed and how?
     What other changes can the agencies incorporate to make 
the regulation easier to understand?

The Text of the Proposed Common Rules (All Agencies)

    The text of the further amendments to the proposed common rules 
published January 11, 2011, at 76 FR 1912 through 1920, consisting of 
the proposed addition of new definitions to Section 2 in alphabetical 
order, addition of Schedule A to Section 2, and a revised Section 10, 
is set forth below:

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

* * * * *

Section 2. Definitions

* * * * *
    Affiliate with respect to a company means any company that 
controls, is controlled by, or is under common control with, the 
company.
* * * * *
    Control A person or company controls a company if it
    (1) Owns, controls, or holds with power to vote 25 percent or 
more of a class of voting securities of the company; or
    (2) Consolidates the company for financial reporting purposes.
* * * * *
    Corporate debt position means a debt position that is an 
exposure to a company that is not a sovereign entity, the Bank for 
International Settlements, the European Central Bank, the European 
Commission, the International Monetary Fund, a multilateral 
development bank, a depository institution, a foreign bank, a credit 
union, a public sector entity, a government sponsored entity, or a 
securitization.
* * * * *
    Country risk classification (CRC) for a sovereign entity means 
the consensus CRC published from time to time by the Organization 
for Economic Cooperation and Development that provides a view of the 
likelihood that the sovereign entity will service its external debt.
* * * * *
    Credit derivative means a financial contract executed under 
standard industry documentation that allows one party (the 
protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure(s)) to another party (the protection 
provider).
    Credit union means an insured credit union as defined under the 
Federal Credit Union Act (12 U.S.C. 1752).
    Cumulative losses means the dollar amount of aggregate losses on 
the underlying exposures, net of recoveries, since deal closing or 
origination of a securitization.
* * * * *
    Debt-to-assets ratio means a ratio calculated by dividing a 
public company's total liabilities by the sum of its equity market 
value and total liabilities as reported as of the end of the most 
recent calendar quarter.
* * * * *
    Default by a sovereign entity means noncompliance by the 
sovereign entity with its external debt service obligations or the 
inability or unwillingness of a sovereign entity to service an 
existing obligation according to its original contractual terms, as 
evidenced by failure to pay principal and interest timely and fully, 
arrearages, or restructuring.
* * * * *
    EBITDA-to-assets ratio means a ratio calculated by dividing:
    (1) A corporate entity's cumulative earnings over the previous 
four quarters before interest expense, taxes, depreciation and 
amortization (EBITDA) using data from the four most recently 
reported calendar quarters; by
    (2) Its equity market value plus total liabilities as reported 
as of the end of the most recent calendar quarter.
    Equity market value means the sum of:
    (1) The number of outstanding shares as of the end of the most 
recent calendar quarter multiplied by the company's stock price on 
the last trading day of the most recent calendar quarter; and
    (2) The measure of liabilities reported as of the end of the 
most recent calendar quarter.
* * * * *
    Financial institution means
    (1) A commodity pool as defined in section 1a(10) of the 
Commodity Exchange Act (7 U.S.C. 1a(10));
    (2) A private fund as defined in section 202(a) of the 
Investment Advisors Act of 1940 (15 U.S.C. 80-b-2(a)); except for 
small business investment companies, as defined in section 102 of 
the Small Business Investment Act of 1958 (15 U.S.C. 662), or a 
private fund designed primarily to promote the public welfare, of 
the type permitted under section 24 (Eleventh) of the National Bank 
Act (12 U.S.C. 24 (Eleventh)) and 12 CFR part 24;
    (3) An employee benefit plan as defined in paragraphs (3) and 
(32) of section 3 of the Employee Retirement Income and Security Act 
of 1974 (29 U.S.C. 1002);
    (4) A bank holding company, depository institution, foreign 
bank, credit union, insurance company, securities firm, other than 
an entity designated as a Community Development Financial 
Institution (CDFI) under 12 U.S.C. 4701 et seq. and 12 CFR part 
1805;
    (5) Any other company predominantly engaged in activities that 
are in the business of banking under section 24 (Seventh) of the 
National Bank Act (12 U.S.C. 24), or in activities that are 
financial in nature under section 4(k) of the Bank Holding Company 
of 1956 (12 U.S.C. 1843(k)) as of the date this subpart becomes 
effective (collectively, ``financial activities''); provided that, 
if the company is not an affiliate of the [banking organization] 
calculating its capital requirements under this appendix, then the 
[banking organization] may exclude activities set forth on Schedule 
A when determining whether the company is predominantly engaged in 
financial activities.
    (6) Any non-U.S. entity that would be covered by any of 
paragraphs (1) through (5) of this definition if such entity was 
organized in the United States; or
    (7) Any other company that the [AGENCY] may determine is a 
financial institution based on the nature and scope of its 
activities.
    (8) For the purposes of this part, a company is ``predominantly 
engaged'' in financial activities, if:
    (i) 85 percent or more of the total consolidated annual gross 
revenues (as determined in accordance with applicable accounting 
standards) of the company in either of the two most recent calendar 
years were derived, directly or indirectly, by the company on a 
consolidated basis from financial activities; or
    (ii) 85 percent or more of the company's consolidated total 
assets (as determined in accordance with applicable accounting 
standards) as of the end of either of the two most recent calendar 
years were related to financial activities.
    Foreign bank means a foreign bank as defined in Sec.  211.2 of 
the Federal Reserve Board's Regulation K (12 CFR 211.2) other than a 
depository institution.
* * * * *
    General obligation means a bond or similar obligation that is 
guaranteed by the full faith and credit of states or other political 
subdivisions of a sovereign entity.
    Government sponsored entity (GSE) means an entity established or 
chartered by the U.S. government to serve public purposes specified 
by the U.S. Congress but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government.
* * * * *
    Multilateral development bank (MDB) means the International Bank 
for Reconstruction and Development, the Multilateral Investment 
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Bank for Reconstruction and 
Development, the European Investment Bank, the European Investment 
Fund, the Nordic Investment Bank, the Caribbean Development Bank, 
the Islamic Development Bank, the Council of Europe Development 
Bank, and any other multilateral lending institution or regional 
development bank in

[[Page 79401]]

which the U.S. government is a shareholder or contributing member or 
which the [AGENCY] determines poses comparable credit risk.
* * * * *
    Private company means a company that is not a public company.
    Public company means a company that has issued common shares or 
equivalent equity instruments that are publicly traded.
* * * * *
    Public sector entity (PSE) means a state, local authority, or 
other governmental subdivision below the sovereign entity level.
    Publicly traded means traded on:
    (1) Any exchange registered with the SEC as a national 
securities exchange under section 6 of the Securities Exchange Act 
of 1934 (15 U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers 
to buy and sell so that a sales price reasonably related to the last 
sales price or current bona fide competitive bid and offer 
quotations can be determined promptly and a trade can be settled at 
such a price within five business days.
* * * * *
    Revenue obligation means a bond or similar obligation, including 
loans and leases, that is an obligation of a state or other 
political subdivision of a sovereign entity, but for which the 
government entity is committed to repay with revenues from the 
specific project financed rather than with general tax funds.
* * * * *
    Sovereign debt position means a direct exposure to a sovereign 
entity.
* * * * *
    Sovereign of incorporation means the country where an entity is 
incorporated, chartered, or similarly established
* * * * *
    Stock return volatility measure means the annual volatility of 
the corporate entity's monthly stock returns calculated as the 
standard deviation of the monthly stock returns calculated using 
prices as of the last trading day of each month over the preceding 
12 months, adjusted for stock splits.
    Underlying exposure means one or more exposures that have been 
securitized in a securitization transaction.

Schedule A to Section 2

    Acting as a certification authority for digital signatures. 
Providing services designed to verify or authenticate the identity 
of customers conducting financial and non-financial transactions 
over the Internet and other ``open'' electronic networks.
    Administrative and related services to mutual funds. Providing 
administrative and related services to mutual funds.
    ATM sales to banks and ATM services. Purchasing ATMs for resale 
to banks, and providing services for banks in the ATM network.
    Career counseling services. Providing career counseling services 
to:
    (1) A financial organization and individuals currently employed 
by, or recently displaced from, a financial organization;
    (2) Individuals who are seeking employment at a financial 
organization; and
    (3) Individuals who are currently employed in or who seek 
positions in the finance, accounting, and audit departments of any 
company.
    Coins, buying and selling. Buying and selling privately minted 
commemorative coins.
    Collection agency services. Collecting overdue accounts 
receivable, either retail or commercial.
    Community development activities.
    (1) Making equity and debt investments in corporations or 
projects designed primarily to promote community welfare, such as 
the economic rehabilitation and development of low-income areas by 
providing housing, services, or jobs for residents, including any 
investment of the type permitted under section 24 (Eleventh) of the 
National Bank Act (12 U.S.C. 24 (Eleventh)) and 12 CFR part 24; and
    (2) Providing advisory and related services for programs 
designed primarily to promote community welfare.
    Courier services. Providing courier services for:
    (1) Checks, commercial papers, documents, and written 
instruments (excluding currency or bearer-type negotiable 
instruments) that are exchanged among banks and financial 
institutions; and
    (2) Audit and accounting media of a banking or financial nature 
and other business records and documents used in processing such 
media.
    Credit bureau services. Maintaining information related to the 
credit history of consumers and providing the information to a 
credit grantor who is considering a borrower's application for 
credit or who has extended credit to the borrower.
    Data processing.
    (1) Providing data processing and data transmission services; 
facilities (including data processing and data transmission 
hardware, software, documentation, or operating personnel); 
databases; advice; and access to services, facilities, or databases 
by any technological means if the data to be processed, stored or 
furnished are financial, banking, or economic; and
    (2) Conducting data processing and data transmission activities 
not described above that are not financial, banking, or economic.
    Development of marketing plans and materials for mutual funds. 
Developing marketing plans and the preparation of advertising, sales 
literature, and marketing materials for mutual funds.
    Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    Financial and investment advisory activities. Acting as an 
investment adviser or financial adviser to any person, including:
    (1) Serving as an investment adviser to an investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80b-
3) including sponsoring, organizing, and managing a closed-end 
investment company;
    (2) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (3) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
reorganizations, recapitalizations, capital structurings, financing 
transactions, and similar transactions, and conducting financial 
feasibility studies;
    (4) Providing information, statistical forecasting, and advice 
with respect to any transaction in foreign exchange, swaps and 
similar transactions, commodities, and any forward contract, option, 
future, option on a future, and similar instruments;
    (5) Providing educational courses and instructional materials to 
consumers on individual financial-management matters; and
    (6) Providing tax-planning and tax-preparation services to any 
person.
    Finder activities. Acting as a finder in bringing together one 
or more buyers and sellers of any product or service for 
transactions that the parties themselves negotiate and consummate.
    Investment in companies that develop, distribute and support 
software. Investing and taking warrants in companies that develop, 
distribute, and support software that enables secure payments over 
the Internet.
    Leasing personal or real property. Leasing personal or real 
property or acting as agent, broker, or adviser in leasing such 
property.
    Management consulting and counseling activities: Providing 
management consulting advice:
    (1) On any matter to unaffiliated depository institutions, 
including commercial banks, savings and loan associations, savings 
banks, credit unions, industrial banks, Morris Plan banks, 
cooperative banks, industrial loan companies, trust companies, and 
branches or agencies of foreign banks; and
    (2) On any financial, economic, accounting, or audit matter to 
any other company.
    Money orders, savings bonds, and traveler's checks. The issuance 
and sale at retail of money orders and similar consumer-type payment 
instruments; the sale of U.S. savings bonds; and the issuance and 
sale of traveler's checks.
    Operating a travel agency. Operating a travel agency in 
connection with financial services.
    Printing and selling MICR-encoded checks and related documents. 
Printing and selling checks and related documents, including 
corporate image checks, cash tickets, voucher checks, deposit slips, 
savings withdrawal packages, and other forms that require Magnetic 
Ink Character Recognition (MICR) encoding.
    Providing employment histories to third parties. Proving 
employment histories to

[[Page 79402]]

third-party credit grantors, including depository and nondepository 
grantors, for use in making decisions to extend credit, and to 
third-party depository institutions and their affiliates, including 
credit unions and their affiliates for use in the regular course of 
their business, including the hiring of employees.
    Real estate and personal property appraising. Performing 
appraisals of real estate and tangible and intangible personal 
property, including securities.
    Real estate settlement servicing. Providing real estate 
settlement services, including through a title insurance agency.
    Real estate title abstracting. Reporting factual information 
concerning the interests or ownership of selected real property.
    Sales-tax refund agency activities. Acting as a sales-tax refund 
agent on behalf of state and local governments.
    Sale of government services. Sale of government services 
involving:
    (1) Postage stamps and postage-paid envelopes;
    (2) Public transportation tickets and tokens;
    (3) Vehicle registration services (including the sale and 
distribution of license plates and license tags for motor vehicles); 
and
    (4) Notary public services.
    Sale or license of corporate credit card data processing 
software. Purchasing for resale or licensing data processing 
software designed to monitor corporate credit card usage, merge 
usage data, generate invoices, and approve/make payments.
    Sale of Web site software and other Web site hosting services. 
Selling Web site editing software as part of a bundle of internet-
based Web site hosting services for bank customers; and developing 
new software products to be used in conjunction with transaction 
processing services and in developing Internet-based services.
    Software development and production. Engaging in joint ventures 
to develop and distribute home banking and financial management 
software to be distributed through banks and through retail outlets.
    Title insurance agency activities. Operating a title insurance 
agency.
* * * * *

Section 10. Standardized Measurement Method for Specific Risk

    (a) General requirement. A [banking organization] must calculate 
a total specific risk add-on for each portfolio of debt and equity 
positions for which the [banking organization]'s VaR-based measure 
does not capture all material aspects of specific risk and for all 
securitization positions that are not modeled under section 9 of 
this rule. A [banking organization] must calculate each specific 
risk add-on in accordance with the requirements of this section.
    (1) The specific risk add-on for an individual debt or 
securitization position that represents purchased credit protection 
is capped at the market value of the position.
    (2) For debt, equity, or securitization positions that are 
derivatives with linear payoffs, a [banking organization] must 
assign a specific risk-weighting factor to the market value of the 
effective notional amount of the underlying instrument or index 
portfolio. A swap must be included as an effective notional position 
in the underlying instrument or portfolio, with the receiving side 
treated as a long position and the paying side treated as a short 
position. For debt, equity, or securitization positions that are 
derivatives with nonlinear payoffs, a [banking organization] must 
risk weight the market value of the effective notional amount of the 
underlying instrument or portfolio multiplied by the derivative's 
delta.
    (3) For debt, equity, or securitization positions, a [banking 
organization] may net long and short positions (including 
derivatives) in identical issues or identical indices. A [banking 
organization] may also net positions in depositary receipts against 
an opposite position in an identical equity in different markets, 
provided that the [banking organization] includes the costs of 
conversion.
    (4) A set of transactions consisting of either a debt position 
and its credit derivative hedge or a securitization position and its 
credit derivative hedge has a specific risk add-on of zero if the 
debt or securitization position is fully hedged by a total return 
swap (or similar instrument where there is a matching of swap 
payments and changes in market value of the debt or securitization 
position) and there is an exact match between the reference 
obligation of the swap and the debt or securitization position, the 
maturity of the swap and the debt or securitization position, and 
the currency of the swap and the debt or securitization position.
    (5) The specific risk add-on for a set of transactions 
consisting of either a debt position and its credit derivative hedge 
or a securitization position and its credit derivative hedge that 
does not meet the criteria of paragraph (a)(4) of this section is 
equal to 20.0 percent of the capital requirement for the side of the 
transaction with the higher capital requirement when the credit risk 
of the position is fully hedged by a credit default swap or similar 
instrument and there is an exact match between the reference 
obligation of the credit derivative hedge and the debt or 
securitization position, the maturity of the credit derivative hedge 
and the debt or securitization position, and the currency of the 
credit derivative hedge and the debt or securitization position.
    (6) The specific risk add-on for a set of transactions 
consisting of either a debt position and its credit derivative hedge 
or a securitization position and its credit derivative hedge that 
does not meet the criteria of either paragraph (a)(4) or (a)(5) of 
this section, but in which all or substantially all of the price 
risk has been hedged, is equal to the specific risk add-on for the 
side of the transaction with the higher specific risk add-on.
    (b) Debt and securitization positions. (1) Unless otherwise 
provided in paragraph (b)(3) of this section, the total specific 
risk add-on for a portfolio of debt or securitization positions is 
the sum of the specific risk add-ons for individual debt or 
securitization positions, as computed under this section. To 
determine the specific risk add-on for individual debt or 
securitization positions, a [banking organization] must multiply the 
absolute value of the current market value of each net long or net 
short debt or securitization position in the portfolio by the 
appropriate specific risk-weighting factor as set forth in 
paragraphs (b)(2)(i) through (b)(2)(vii) of this section.
    (2) For the purpose of this section, the appropriate specific 
risk-weighting factors include:
    (i) Sovereign debt positions. (A) In general. A [banking 
organization] must assign a specific risk-weighting factor to a 
sovereign debt position based on the CRC applicable to the sovereign 
entity in accordance with Table 2.
    (1) Sovereign debt positions that are backed by the full faith 
and credit of the United States are to be treated as having a CRC 
rating of 0.

  Table 2--Specific Risk-Weighting Factors for Sovereign Debt Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
        Sovereign CRC              Specific risk-weighting factor (in
                                                percent)
------------------------------------------------------------------------
0-1..........................                      0.0
                              ------------------------------------------
2-3..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                final maturity
                                greater than 6
                                months and up to and
                                including 24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------
4-6..........................                      8.0
                              ------------------------------------------
7............................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------


[[Page 79403]]

    (B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a 
[banking organization] may assign to a sovereign debt position a 
specific risk-weighting factor that is lower than the applicable 
specific risk-weighting factor in Table 2 if:
    (1) The position is denominated in the sovereign entity's 
currency;
    (2) The [banking organization] has at least an equivalent amount 
of liabilities in that currency; and
    (3) The sovereign entity allows banks under its jurisdiction to 
assign the lower specific risk-weighting factor to the same 
exposures to the sovereign entity.
    (C) A [banking organization] must assign a 12.0 percent specific 
risk-weighting factor to a sovereign debt position (1) immediately 
upon determination that the sovereign entity has defaulted on any 
outstanding sovereign debt position, or (2) if the sovereign entity 
has defaulted on any sovereign debt position during the previous 
five years.
    (D) A [banking organization] must assign an 8.0 percent specific 
risk-weighting factor to a sovereign debt position if the sovereign 
entity does not have a CRC assigned to it, unless the sovereign debt 
position must be assigned a higher specific risk-weighting factor 
under paragraph (b)(2)(i)(C) of this section.
    (ii) Certain supranational entity and multilateral development 
bank debt positions. A [banking organization] may assign a 0.0 
percent specific risk-weighting factor to a debt position that is an 
exposure to the Bank for International Settlements, the European 
Central Bank, the European Commission, the International Monetary 
Fund, or an MDB.
    (iii) GSE debt positions. A [banking organization] must assign a 
1.6 percent specific risk-weighting factor to a debt position that 
is an exposure to a GSE. Notwithstanding the forgoing, a [banking 
organization] must assign an 8.0 percent specific risk-weighting 
factor to preferred stock issued by a GSE.
    (iv) Depository institution, foreign bank, and credit union debt 
positions. (A) Except as provided in paragraph (b)(2)(iv)(B) of this 
section, a [banking organization] must assign a specific risk-
weighting factor to a debt position that is an exposure to a 
depository institution, a foreign bank, or a credit union using the 
specific risk-weighting factor that corresponds to that entity's 
sovereign of incorporation in accordance with Table 3.

  Table 3--Specific Risk-Weighting Factors for Depository Institution,
              Foreign Bank, and Credit Union Debt Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     CRC of Sovereign of           Specific risk-weighting factor (in
        Incorporation                           percent)
------------------------------------------------------------------------
0-2..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                maturity up to and
                                including 24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------
3............................                      8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------

     (B) A [banking organization] must assign a specific risk-
weighting factor of 8.0 percent to a debt position that is an 
exposure to a depository institution or a foreign bank that is 
includable in the depository institution's or foreign bank's 
regulatory capital and that is not subject to deduction as a 
reciprocal holding pursuant to 12 CFR part 3, appendix A, section 
2(c)(6)(ii) (national banks); 12 CFR part 208, appendix A, section 
II.B.3 (state member banks); 12 CFR part 225, appendix A, section 
II.B.3 (bank holding companies); 12 CFR part 325, appendix A, 
section I.B.(4) (state nonmember banks); and 12 CFR part 
167.5(c)(2)(i) (savings associations).
    (v) PSE debt positions. (A) Except as provided in paragraph 
(b)(2)(v)(B) of this section, a [banking organization] must assign a 
risk-weighting factor to a debt position that is an exposure to a 
PSE based on the specific risk-weighting factor that corresponds to 
the PSE's sovereign of incorporation and to the position's 
categorization as a general obligation or revenue obligation, as set 
forth in Tables 4 and 5.
    (B) A [banking organization] may assign a lower specific risk-
weighting factor than would otherwise apply under Table 4 to a debt 
position that is an exposure to a foreign PSE if:
    (1) The PSE's sovereign of incorporation allows banks under its 
jurisdiction to assign a lower specific risk-weighting factor to 
such position; and
    (2) The specific risk-weighting factor is not lower than the 
risk-weight that corresponds to the PSE's sovereign of incorporation 
in accordance with Table 4.

Table 4--Specific Risk-Weighting Factors for PSE General Obligation Debt
                                Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     Sovereign Entity CRC          General obligation specific risk-
                                      weighting factor (in percent)
------------------------------------------------------------------------
0-2..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                maturity up to and
                                including 24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------
3............................                      8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                      8.0
------------------------------------------------------------------------


Table 5--Specific Risk-Weighting Factors for PSE Revenue Obligation Debt
                                Positions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
     Sovereign Entity CRC          Revenue obligation specific risk-
                                      weighting factor (in percent)
------------------------------------------------------------------------
0-1..........................  Residual term to                     0.25
                                final maturity 6
                                months or less.
                               Residual term to                      1.0
                                maturity up to and
                                including 24 months.
                               Residual term to                      1.6
                                final maturity
                                exceeding 24 months.
                              ------------------------------------------

[[Page 79404]]

 
2-3..........................                     8.0
                              ------------------------------------------
4-7..........................                     12.0
                              ------------------------------------------
No CRC.......................                     8.0
------------------------------------------------------------------------

     (vi) Corporate debt positions. A [banking organization] must 
assign a specific risk-weighting factor to a corporate debt position 
in accordance with the methodologies in paragraph (b)(2)(vi)(A) or 
(b)(2)(vi)(B) of this section provided that the [banking 
organization] consistently applies the same methodology to all 
corporate debt positions.
    (A) Simple methodology. A [banking organization] that uses the 
simple methodology must assign a specific risk-weighting factor of 
8.0 percent to all of its corporate debt positions.
    (B) Indicator-based methodology. A [banking organization] that 
elects to use the indicator-based methodology must assign a specific 
risk-weighting factor to its corporate debt positions in accordance 
with paragraphs (b)(2)(vi)(B)(1) through (b)(2)(vi)(B)(4) of this 
section.
    (1) Debt positions in a public company that is not a financial 
institution. A [banking organization] must assign a specific risk-
weighting factor to a corporate debt position that is an exposure to 
a public company that is not a financial institution, as set forth 
in Table 6, corresponding with the results of the following 
calculations, using the most recently available data reported by the 
company:
    (i) The EBITDA-to-assets ratio for the company;
    (ii) The debt-to-assets ratio for the company; and
    (iii) The stock return volatility measure for the company.

        Table 6--Specific Risk-Weighting Factors for Non-Financial Publicly-Traded Company Debt Positions
----------------------------------------------------------------------------------------------------------------
                                                              Specific risk-weighting factor (in percent)
                                                     -----------------------------------------------------------
     EBITDA-to-assets ratio          Stock return       Debt-to-assets      Debt-to-assets      Debt-to-assets
                                  volatility measure    ratio less than    ratio between 0.2  ratio greater than
                                                              0.2               and 0.5               0.5
----------------------------------------------------------------------------------------------------------------
Greater than zero...............  less than 0.1.....               [\1\]                 8.0                 8.0
                                  between 0.1 and                    8.0                 8.0                 8.0
                                   0.15.
                                  greater than 0.15.                 8.0                 8.0                12.0
Less than zero..................  less than 0.1.....                 8.0                 8.0                 8.0
                                  between 0.1 and                    8.0                 8.0                12.0
                                   0.15.
                                  greater than 0.15.                12.0                12.0                12.0
----------------------------------------------------------------------------------------------------------------
\1\ See Table 6A.


   Table 6A--Specific Risk-Weighting Factors for Certain Non-Financial
                 Publicly-Traded Company Debt Positions
------------------------------------------------------------------------
                                                        Specific risk-
           Remaining contractual maturity              weighting factor
                                                         (in percent)
------------------------------------------------------------------------
Residual term to final maturity 6 months or less....                0.25
Residual term to final maturity greater than 6                       1.0
 months and up to and including 24 months...........
Residual term to final maturity exceeding 24 months.                 1.6
------------------------------------------------------------------------

     (2) Financial institution debt position. A [banking 
organization] must assign an 8.0 percent specific risk-weighting 
factor to a corporate debt position that is an exposure to a 
financial institution that is not a depository institution, foreign 
bank, or credit union.
    (3) Debt positions in a private company that is not a financial 
institution. A [banking organization] must assign an 8.0 percent 
specific risk-weighting factor to a corporate debt position that is 
an exposure to a private company that is not a financial 
institution.
    (4) Insufficient information. If a [banking organization] does 
not have sufficient information to determine the appropriate 
specific risk-weighting factor for a corporate debt position under 
paragraphs (b)(2)(vi)(B)(1) through (b)(2)(vi)(B)(3) of this 
section, the [banking organization] must assign an 8.0 percent 
specific risk-weighting factor to the position.
    (C) Limitations. (1) A [banking organization] must assign a 
specific risk-weighting factor of at least 8.0 percent to an 
interest-only mortgage-backed security that is not a securitization 
position.
    (2) A [banking organization] shall not assign a corporate debt 
position a specific risk-weighting factor that is lower than the 
specific risk-weighting factor that corresponds to the CRC rating of 
the obligor's sovereign of incorporation in Table 2.
    (vii) Securitization positions. A [banking organization] may 
assign a specific risk-weighting factor to a securitization position 
using the simplified supervisory formula approach (SSFA) in 
accordance with this paragraph (vii). A [banking organization] that 
elects not to use the SSFA for a securitization position must assign 
a specific risk-weighting factor of 100 percent to the position.
    (A) To use the SSFA to determine the specific risk-weighting 
factor for a securitization position, including re-securitization 
and synthetic securitization positions, a [banking organization] 
must have information that enables it to assign accurately the 
parameters described in paragraph (b)(2)(vii)(B) of this section. 
The [banking organization] also must have and maintain appropriate 
data to measure the cumulative losses for the underlying exposures. 
Data used to assign the parameters described in paragraph 
(b)(2)(vii)(B) and the cumulative losses must be the most currently 
available data and no more than 91 calendar days old. A [banking 
organization] that does not have the appropriate data to assign the 
parameters described in paragraph (b)(2)(vii)(B) must assign a 
specific risk-weighting factor of 100 percent to the position.
    (B) To calculate the specific risk-weighting factor for a 
securitization position, a [banking organization] must use the 
following four parameters:
    (1) KG is the weighted-average (with unpaid principal 
used as the weight for each exposure) total capital requirement of 
the underlying exposures calculated using [general risk-based 
capital rules]. KG is expressed as a decimal value 
between zero and 1 (that is, an average risk weight of 100 percent 
implies a value of KG equal to .08);
    (2) The parameter A is the attachment point for the position, 
which represents the threshold at which credit losses will first be 
allocated to the position. Parameter A equals the ratio of the 
current dollar amount of underlying exposures that are subordinated 
to the position the [banking organization] to the current dollar 
amount of underlying exposures. Any reserve account funded by the 
accumulated cash flows from the underlying exposures that is 
subordinated to the position that contains the [banking 
organization]'s securitization exposure may be included in the 
calculation of parameter A to the extent that cash is present in the

[[Page 79405]]

account. Parameter A is expressed as a decimal value between zero 
and one.
    (3) The parameter D is the detachment point for the position, 
which represents the threshold at which credit losses of principal 
allocated to the position would result in a total loss of principal. 
Parameter D equals parameter A plus the ratio of the current dollar 
amount of the securitization positions that are pari passu with the 
position (that is, have equal seniority with respect to credit risk) 
to the current dollar amount of the underlying exposures. Parameter 
D is expressed as a decimal value between zero and one.
    (4) A supervisory calibration parameter, p, equal to 0.5 for 
securitization positions that are not re-securitization positions 
and equal to 1.5 for re-securitization positions.
    (C) Mechanics of the SSFA. The values of parameters A and D, 
relative to KG determine the specific risk-weighting 
factor assigned to a position as described in this paragraph and 
paragraph (b)(2)(vii)(D) of this section. The specific risk-
weighting factor assigned to a securitization position, or portion 
of a position, as appropriate, is the larger of the specific risk-
weighting factor determined in accordance with this paragraph and 
paragraph (b)(2)(vii)(D) of this section and the specific risk-
weighting factor determined in accordance with paragraph 
(b)(2)(vii)(E) of this section.
    (1) When the detachment point, D, for a securitization position 
is less than or equal to KG, the position must be 
assigned a specific risk-weighting factor of 100 percent.
    (2) When the attachment point, A, for a securitization position 
is greater than or equal to KG, the [banking 
organization] must calculate the specific risk-weighting factor in 
accordance with sub-paragraphs (D)(1) and (D)(2) of this paragraph.
    (3) When A is less than KG and D is greater than 
KG, the portion that lies below KG must be 
assigned a specific risk-weighting factor of 100 percent and the 
[banking organization] must calculate the specific risk-weighting 
factor for the portion that lies above KG in accordance 
with paragraphs (D)(1) and (D)(2) of this paragraph. For the purpose 
of this calculation:
    (i) The portion that lies below KG equals 
KG minus A.
    (ii) The portion that lies above KG equals D minus 
KG.
    (D) SSFA equation. (1) Define the following parameters:
    [GRAPHIC] [TIFF OMITTED] TP21DE11.075
    
    (E) Limitations. A [banking organization] must assign a minimum 
specific risk-weighting factor to a securitization position based on 
the cumulative losses as a percent of the original dollar value of 
KG in accordance with Table 7.

     Table 7--Minimum Specific Risk-Weighting Factor for a Position
------------------------------------------------------------------------
  Cumulative losses of principal on originally
     issued securities as a percent of KG at      Minimum specific risk-
                   origination                     weighting factor  (in
-------------------------------------------------        percent)
      Greater than        Less than or equal to
------------------------------------------------------------------------
                0                       50                      1.6
               50                      100                      8.0
              100                      150                     52.0
              150                      n/a                    100.0
------------------------------------------------------------------------

     (3) Nth-to-default credit derivatives. The total specific risk 
add-on for a portfolio of nth-to-default credit derivatives is the 
sum of the specific risk add-ons for individual nth-to-default 
credit derivatives, as computed under this paragraph. The specific 
risk add-on for each nth-to-default credit derivative position 
applies irrespective of whether a [banking organization] is a net 
protection buyer or net protection seller. A [banking organization] 
must calculate the specific risk add-on for each nth-to-default 
credit derivative as follows:
    (i) First-to-default credit derivatives.
    (A) The specific risk add-on for a first-to-default credit 
derivative is the lesser of:
    (1) The sum of the specific risk add-ons for the individual 
reference credit exposures in the group of reference exposures; or
    (2) The maximum possible credit event payment under the credit 
derivative contract.
    (B) Where a [banking organization] has a risk position in one of 
the reference credit exposures underlying a first-to-default credit 
derivative and this credit derivative hedges the [banking 
organization]'s risk position, the [banking organization] is allowed 
to reduce both the specific risk add-on for the reference credit 
exposure and that part of the specific risk add-on for the credit 
derivative that relates to this particular reference credit exposure 
such that its specific risk add-on for the pair reflects the bank's 
net position in the reference credit exposure. Where a [banking 
organization] has multiple risk positions in reference credit 
exposures underlying a first-to-default credit derivative, this 
offset is allowed only for the underlying reference credit exposure 
having the lowest specific risk add-on.
    (ii) Second-or-subsequent-to-default credit derivatives.
    (A) The specific risk add-on for a second-or-subsequent-to-
default credit derivative is the lesser of:
    (1) The sum of the specific risk add-ons for the individual 
reference credit exposures in the group of reference exposures, but 
disregarding the (n-1) obligations with the lowest specific risk 
add-ons; or
    (2) The maximum possible credit event payment under the credit 
derivative contract.

[[Page 79406]]

    (B) For second-or-subsequent-to-default credit derivatives, no 
offset of the specific risk add-on with an underlying reference 
credit exposure is allowed.
    (c) Modeled correlation trading positions. For purposes of 
calculating the comprehensive risk measure for modeled correlation 
trading positions under either paragraph (a)(2)(i) or (a)(2)(ii) of 
section 9, the total specific risk add-on is the greater of:
    (1) The sum of the [banking organization]'s specific risk add-
ons for each net long correlation trading position calculated under 
this section; or
    (2) The sum of the [banking organization]'s specific risk add-
ons for each net short correlation trading position calculated under 
this section.
    (d) Non-modeled securitization positions. For securitization 
positions that are not correlation trading positions and for 
securitizations that are correlation trading positions not modeled 
under section 9 of this rule, the total specific risk add-on is the 
greater of:
    (1) The sum of the [banking organization]'s specific risk add-
ons for each net long securitization position calculated under this 
section; or
    (2) The sum of the [banking organization]'s specific risk add-
ons for each net short securitization position calculated under this 
section.
    (e) Equity positions. The total specific risk add-on for a 
portfolio of equity positions is the sum of the specific risk add-
ons of the individual equity positions, as computed under this 
section. To determine the specific risk add-on of individual equity 
positions, a [banking organization] must multiply the absolute value 
of the current market value of each net long or net short equity 
position by the appropriate specific risk-weighting factor as 
determined under this paragraph.
    (1) The [banking organization] must multiply the absolute value 
of the current market value of each net long or net short equity 
position by a specific risk-weighting factor of 8.0 percent. For 
equity positions that are index contracts comprising a well-
diversified portfolio of equity instruments, the absolute value of 
the current market value of each net long or net short position is 
multiplied by a specific risk-weighting factor of 2.0 percent.\45\
---------------------------------------------------------------------------

    \45\ A portfolio is well-diversified if it contains a large 
number of individual equity positions, with no single position 
representing a substantial portion of the portfolio's total market 
value.
---------------------------------------------------------------------------

    (2) For equity positions arising from the following futures-
related arbitrage strategies, a [banking organization] may apply a 
2.0 percent specific risk-weighting factor to one side (long or 
short) of each position with the opposite side exempt from an 
additional capital requirement:
    (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.
    (3) For futures contracts on main indices that are matched by 
offsetting positions in a basket of stocks comprising the index, a 
[banking organization] may apply a 2.0 percent specific 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 is comprised of 
stocks representing at least 90.0 percent of the capitalization of 
the index. A main index refers to the Standard & Poor's 500 Index, 
the FTSE All-World Index, and any other index for which the [banking 
organization] can demonstrate to the satisfaction of the [AGENCY] 
that the equities represented in the index have liquidity, depth of 
market, and size of bid-ask spreads comparable to equities in the 
Standard & Poor's 500 Index and FTSE All-World Index.
    (f) Due diligence requirements. (1) A [banking organization] 
must be able to demonstrate to the satisfaction of the [AGENCY] a 
comprehensive understanding of the features of a securitization 
position that would materially affect the performance of the 
position. The [banking organization]'s analysis must be commensurate 
with the complexity of the securitization position and the 
materiality of the position in relation to capital.
    (2) To support the demonstration of its comprehensive 
understanding, for each securitization position a [banking 
organization] must:
    (i) Conduct and document an analysis of the risk characteristics 
of a securitization position prior to acquiring the position, 
considering:
    (A) Structural features of the securitization that would 
materially impact the performance of the position, for example, the 
contractual cash flow waterfall, waterfall-related triggers, credit 
enhancements, liquidity enhancements, market value triggers, the 
performance of organizations that service the position, and deal-
specific definitions of default;
    (B) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 
30, 60, and 90 days past due; default rates; prepayment rates; loans 
in foreclosure; property types; occupancy; average credit score or 
other measures of creditworthiness; average loan-to-value ratio; and 
industry and geographic diversification data on the underlying 
exposure(s);
    (C) Relevant market data of the securitization, for example, 
bid-ask spreads, most recent sales price and historical price 
volatility, trading volume, implied market rating, and size, depth 
and concentration level of the market for the securitization; and
    (D) For re-securitization positions, performance information on 
the underlying securitization exposures, for example, the issuer 
name and credit quality, and the characteristics and performance of 
the exposures underlying the securitization exposures; and
    (ii) On an on-going basis (no less frequently than quarterly), 
evaluate, review, and update as appropriate the analysis required 
under paragraph (d)(1) of this section for each securitization 
position.
    [End of Common Text]

List of Subjects

12 CFR Part 3

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

12 CFR Part 208

    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, Banks, banking, Capital 
Adequacy, Reporting and recordkeeping requirements, Savings 
associations, State non-member banks.

Adoption of Common Rule

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the common preamble, the Office of the 
Comptroller of the Currency proposes to further amend part 3 of chapter 
I of title 12 of Code of Federal Regulations, as proposed to be amended 
January 11, 2011, at 76 FR 1912 and 1921, as follows:

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    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.

    2. Appendix B to part 3 is amended as set forth at the end of the 
common preamble.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the common preamble, the Board of 
Governors of the Federal Reserve System proposes to further amend parts 
208 and 225 of chapter II of title 12 of the Code of Federal 
Regulations as proposed to be amended January 11,

[[Page 79407]]

2011, at 76 FR 1912 and 1921, as follows:

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

    3. 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), 
1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 
1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 
U.S.C. 78b, 78I(b), 78l(i), 780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 
1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 
4104b, 4106 and 4128.

    4. Part 208 is amended as set forth at the end of the common 
preamble.

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

    5. 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. 1681s, 1681w, 6801 and 6805.

    6. Part 225 is amended as set forth at the end of the common 
preamble.

Federal Deposit Insurance Corporation

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the common preamble, the Federal 
Deposit Insurance Corporation proposes to further amend part 325 of 
chapter III of title 12 of Code of Federal Regulations, as proposed to 
be amended January 11, 2011, at 76 FR 1912 and 1921, as follows:

PART 325--CAPITAL MAINTENANCE

    7. 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, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended 
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).

    8. Appendix C to part 325 is amended as set forth at the end of the 
common preamble.

    Dated: December 7, 2011.
John Walsh,
Acting Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, dated: Dec. 7, 2011.

Jennifer J. Johnson,
Secretary of the Board.

    By order of the Board of Directors.

    Dated at Washington, DC, this 7th day of December 2011.

Federal Deposit Insurance Corporation.

Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-32073 Filed 12-20-11; 8:45 am]
BILLING CODE P