[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Proposed Rules]
[Pages 21057-21065]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8467]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 9
[Docket No. OCC-2011-0023]
RIN 1557-AD37
Short-Term Investment Funds
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The OCC is requesting comment on a proposal that would revise
the requirements imposed on banks pursuant to 12 CFR 9.18(b)(4)(ii)(B),
the short-term investment fund (STIF) rule (STIF Rule). The proposal
would add safeguards designed to address the risk of loss to a STIF's
principal, including measures governing the nature of a STIF's
investments, ongoing monitoring of its mark-to-market value and
forecasting of potential changes in its mark-to-market value under
adverse market conditions, greater transparency and regulatory
reporting about a STIF's holdings, and procedures to protect fiduciary
accounts from undue dilution of their participating interests in the
event that the STIF loses the ability to maintain a stable net asset
value (NAV).
DATES: Comments should be received on or before June 8, 2012.
ADDRESSES: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by
the Federal eRulemaking Portal or email, if possible. Please use the
title ``Short-Term Investment Funds'' 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. Click ``Advanced Search''. Select
``Document Type'' of ``Proposed Rule'', and in ``By Keyword or ID''
box, enter Docket ID ``OCC-2011-0023'', and click ``Search''. If
proposed rules for more than one agency are listed, in the ``Agency''
column, locate the notice of proposed rulemaking for the OCC. Comments
can be filtered by Agency using the filtering tools on the left side of
the screen. In the ``Actions'' 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-2011-0023'' 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 notice of proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Click ``Advanced Search''. Select ``Document
Type'' of ``Public Submission'', and in ``By Keyword or ID'' box enter
Docket ID ``OCC-2011-0023'', and click ``Search''. If comments from
more than one agency are listed, the ``Agency'' column will indicate
which comments were received by the OCC. Comments can be filtered by
Agency using the filtering tools on the left side of the screen.
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.
FOR FURTHER INFORMATION CONTACT: OCC: Joel Miller, Group Leader, Asset
Management (202) 874-4493, David
[[Page 21058]]
Barfield, NBE, Market Risk (202) 874-1829, Patrick T. Tierney, Counsel,
Legislative and Regulatory Activities Division (202) 874-5090, or Adam
Trost, Senior Attorney, Securities and Corporate Practices Division
(202) 874-5210, Office of the Comptroller of the Currency, 250 E Street
SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
A. Short-Term Investment Funds (STIFs)
A Collective Investment Fund (CIF) is a bank-managed fund that
holds pooled fiduciary assets that meet specific criteria established
by the OCC fiduciary activities regulation at 12 CFR 9.18. Each CIF is
established under a ``Plan'' that details the terms under which the
bank manages and administers the fund's assets. The bank acts as a
fiduciary for the CIF and holds legal title to the fund's assets.
Participants in a CIF are the beneficial owners of the fund's assets.
Each participant owns an undivided interest in the aggregate assets of
a CIF; a participant does not directly own any specific asset held by a
CIF.\1\
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\1\ 12 CFR 9.18.
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CIFs are designed to enhance investment management capabilities by
combining assets from different accounts into a single fund with a
specific investment strategy. By pooling fiduciary assets, a bank may
lower the operational and administrative expenses associated with
investing fiduciary assets and enhance risk management and investment
performance for the participating accounts.
A fiduciary account's investment in a CIF is called a
``participating interest.'' Participating interests in a CIF are not
FDIC-insured and are not subject to potential claims by a bank's
creditors. In addition, a participating interest in a CIF cannot be
pledged or otherwise encumbered in favor of a third party.
The general rule for valuation of a CIF's assets specifies that a
CIF admitting a fiduciary account (that is, allowing the fiduciary
account, in effect, to purchase its proportionate interest in the
assets of the CIF) or withdrawing the fiduciary account (that is,
allowing the fiduciary account, in effect, to redeem the value of its
proportionate interest in the CIF) may only do so on the basis of a
valuation of the CIF's assets, as of the admission or withdrawal date,
based on the mark-to-market value of the CIF's assets.\2\ This general
valuation rule is designed to protect all fiduciary accounts
participating in the CIF from the risk that other accounts will be
admitted or withdrawn at valuations that dilute the value of existing
participating interests in the CIF.
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\2\ 12 CFR 9.18(b)(5)(i). If the bank cannot readily ascertain
market value as of the valuation date, the bank generally must use a
fair value for the asset, determined in good faith. 12 CFR
9.18(b)(4)(ii)(A).
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A STIF is a type of CIF that permits a bank to value the STIF's
assets on an amortized cost basis, rather than at mark-to-market value,
for purposes of admissions and withdrawals. This is an exception to the
general rule of market valuation. In order to qualify for this
exception, a STIF's Plan must require the bank to: (1) Maintain a
dollar-weighted average portfolio maturity of 90 days or less; (2)
accrue on a straight-line or amortized basis the difference between the
cost and anticipated principal receipt on maturity; and (3) hold the
fund's assets until maturity under usual circumstances.\3\ These
conditions are designed to protect fiduciary accounts from the risk of
dilution of the value of their participating interests. In particular,
by limiting the STIF's investments to shorter-term assets and generally
requiring those assets to be held to maturity, realized differences
between the amortized cost and mark-to-market value of the assets will
be rare, absent atypical market conditions or an impaired asset. As
further discussed in this SUPPLEMENTARY INFORMATION section, the
amortized cost approach is beneficial for many fiduciary accounts,
because some participants require that a certain percentage of the
assets held in these accounts be in a liquid, low risk investment.
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\3\ 12 CFR 9.18(b)(4)(ii)(B).
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The OCC's STIF Rule governs STIFs managed by national banks. In
addition, regulations adopted by the Office of Thrift Supervision, now
recodified as OCC rules pursuant to Title III of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,\4\ have long required
federal savings associations (FSAs) to comply with the requirements of
the OCC's STIF Rule.\5\ Thus, the proposed revisions to the national
bank STIFs Rule would apply to a federal savings association that
establishes and administers a STIF fund. As of December 31, 2011, there
was approximately $112 billion invested in STIFs administered by
national banks and there were no STIFs administered by FSAs
reported.\6\
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\4\ 76 FR 48950 (2011).
\5\ 12 CFR 150.260.
\6\ Fifteen national banks collectively reported STIF
investments that they administer. Based on thrift financial report
data, federal savings associations administered no STIFs as of
December 31, 2011. Other types of institutions managing certain
types of CIFs may also observe the requirements of the OCC's STIF
Rule. For example, New York state law provides that all investments
in short-term investment common trust funds may be valued at cost,
if the plan of operation requires that: (i) The type or category of
investments of the fund shall comply with the rules and regulations
of the Comptroller of the Currency pertaining to short-term
investment funds and (ii) in computing income, the difference
between cost of investment and anticipated receipt on maturity of
investment shall be accrued on a straight-line basis. See N.Y. Comp.
Codes R. & Regs. Tit. 3, Sec. 22.23 (2010). Additionally, in order
to retain their tax-exempt status, common trust funds must operate
in compliance with Sec. 9.18 as well as the federal tax laws. See
26 U.S.C. 584. The OCC does not have access to comprehensive data
quantifying investments held by STIF funds administered by other
types of institutions pursuant to legal requirements incorporating
the OCC's STIF Rule. Although the direct scope of the STIF Rule
provisions in section 9.18 of the OCC's regulations is national
banks and Federal branches and agencies of foreign banks acting in a
fiduciary capacity (12 CFR 9.1(c)), the nomenclature of the STIF
Rule refers simply to ``banks.'' For the sake of convenience, the
OCC proposes to continue this approach and also applies the same
convention to the discussion of the STIF Rule in this Notice of
Proposed Rulemaking.
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The OCC is proposing to revise the requirements of the STIF Rule.
While fiduciary accounts participating in a STIF have an interest in
the fund maintaining a stable net asset value (NAV), ultimately the
participating interests remain subject to the risk of loss to a STIF's
principal. The OCC is proposing additional safeguards designed to
address this risk in several ways. These include measures governing the
nature of a STIF's investments, ongoing monitoring of the STIF's mark-
to-market value and assessment of potential changes in its mark-to-
market value under adverse market conditions, greater transparency and
regulatory reporting about the STIF's holdings, and procedures to
protect fiduciary accounts from undue dilution of their participating
interests in the event that the STIF loses the ability to maintain a
stable NAV.
B. Comparison to Other Products That Seek To Maintain a Stable NAV
There are other types of funds that seek to maintain a stable NAV.
By far, the most significant of these from a financial market presence
standpoint are ``money market mutual funds'' (MMMFs). These funds are
organized as open-ended management investment companies and are
regulated by the U.S. Securities and Exchange Commission (``SEC'')
pursuant to the Investment Company Act of 1940, particularly pursuant
to the provisions of SEC Rule 2a-7 thereunder (``Rule 2a-7'').\7\
[[Page 21059]]
MMMFs seek to maintain a stable share price, typically $1.00 a share.
In this regard, they are similar to STIFs.
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\7\ 15 U.S.C. 80a; 17 CFR 270.2a-7. Because STIFs are a form of
collective investment fund, they are generally exempt from the SEC's
rules under the Investment Company Act. STIFs used exclusively for
(1) the collective investment of money by a bank in its fiduciary
capacity as trustee, executor, administrator, or guardian and (2)
the collective investment of assets of certain employee benefit
plans are exempt from the Investment Company Act under 15 U.S.C.
80a-3(c)(3) and (c)(11), respectively. MMMFs are not subject to
comparable restrictions as to the type of participant who may invest
in the fund or the purpose of such investment.
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However, there are a number of important differences between MMMFs
and STIFs; most significantly, MMMFs are open to retail investors,
whereas, STIFs only are available to authorized fiduciary accounts.
MMMFs may be offered to the investing public and have become a popular
product with retail investors, corporate money managers, and
institutional investors seeking returns equivalent to current short-
term interest rates in exchange for high liquidity and the prospect of
protection against the loss of principal. In contrast to the
approximately $112 billion currently held in STIFs administered by
national banks, MMMFs, as of December 2011, held approximately $2.7
trillion dollars of investor assets.\8\
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\8\ See http://www.ici.org/info/mm_data_2011.xls.
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During the recent period of financial market stress, beginning in
2007 and stretching into 2009, certain types of short-term debt
securities frequently held by MMMFs experienced unusually high
volatility. Concerns by investors that their MMMFs could not maintain a
stable NAV eventually led to investor redemptions out of those funds,
and some funds needed to liquidate sizeable portions of their
securities to meet investor redemption requests. This flood of
redemption requests depressed market prices for short-term debt
instruments, exacerbating the problem for all types of stable NAV
funds.
The President's Working Group on Financial Markets (``PWG''),\9\
after reviewing the market turmoil during the period 2007 through 2009,
recommended that the SEC strengthen the regulation and monitoring of
MMMFs and also recommended that bank regulators consider strengthening
the regulation and monitoring of other types of products that seek to
maintain a stable NAV. The October 2010 report from the PWG states:
``[b]anking and state insurance regulators might consider additional
restrictions to mitigate systemic risk for bank common and collective
funds and other investment pools that seek a stable NAV but that are
exempt from registration under sections 3(c)(3) and 3(c)(11) of the
ICA.'' \10\
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\9\ The PWG is comprised of the Secretary of the Treasury, the
Chairman of the Board of Governors of the Federal Reserve System,
the Chairman of the Securities and Exchange Commission, and the
Chairman of the Commodity Futures Trading Commission.
\10\ Report of the President's Working Group on Financial
Markets, Money Market Fund Reform Options, p. 35 (Oct. 2010), see
http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf. See also Financial Stability
Oversight Council 2011 Annual Report, p. 13 (July 2011) available at
http://www.treasury.gov/initiatives/fsoc/Documents/FSOCAR2011.pdf.
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Based on the market turmoil from 2007 through 2009 and the work
done by the PWG, among others, the SEC adopted amendments to Rule 2a-7
to strengthen the resilience of MMMFs.\11\ The OCC's proposed changes
to the STIF Rule are informed by the SEC's revisions to Rule 2a-7, but
differ in certain respects in light of the differences between the
money market mutual fund as an investment product and the STIF, e.g., a
bank's fiduciary responsibility to a STIF and requirements limiting
STIF participation to eligible accounts under the OCC's fiduciary
account regulation at 12 CFR part 9.
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\11\ See Money Market Fund Reform, 75 FR 10060 (Mar. 4, 2010).
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II. Description of Proposed Changes to the STIF Rule
The proposed changes to the STIF Rule would enhance protections
provided to STIF participants and reduce risks to banks that administer
STIFs. The proposed changes add new requirements or amend existing
requirements that a CIF must meet to be considered a STIF and value
assets on an amortized cost basis. The OCC believes many banks that
offer STIFs are already engaged in the risk mitigation efforts set
forth in this proposed rule.
The proposed changes do not affect the obligation that STIFs meet
the CIF requirements described in 12 CFR part 9, which allows national
banks to maintain and invest fiduciary assets, consistent with
applicable law. Applicable law is defined as the law of a state or
other jurisdiction governing a national bank's fiduciary relationships,
any applicable Federal law governing those relationships (e.g., ERISA,
federal tax, and securities laws), the terms of the instrument
governing a fiduciary relationship, or any court order pertaining to
the relationship.\12\ Also, national banks managing CIFs are required
to adopt and follow written policies and procedures that are adequate
to maintain their fiduciary activities in compliance with applicable
law.\13\ Additionally, the STIF Rule requires a STIF's bank manager, at
least once during each calendar year, to conduct a review of all assets
of each fiduciary account for which the bank has investment discretion
to evaluate whether they are appropriate, individually and
collectively, for the account.\14\ These examples of CIF requirements
applicable to STIFs are not exclusive. Other requirements apply, and a
bank must comply will all applicable requirements of 12 CFR part 9 when
acting as a fiduciary for a CIF.
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\12\ 12 CFR 9.2(b).
\13\ 12 CFR 9.5.
\14\ 12 CFR 9.6(c).
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Banks administering a STIF would need to revise the written plan
required by 12 CFR 9.18(b)(1) if this proposal is adopted as a final
rule.
A. Section 9.18(b)(4)(iii)(A)
STIFs typically maintain stable NAVs in order to meet the
expectations of the fund's bank managers and participating fiduciary
accounts.\15\ To the extent a bank fiduciary offers a STIF with a fund
objective of maintaining a stable NAV, participating accounts and the
OCC expect those STIFs to maintain a stable NAV using amortized cost.
The proposal would require a Plan to have as a primary objective that
the STIF operate with a stable NAV of $1.00 per participating
interest.\16\
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\15\ For example, many STIF plan participants (e.g., pensions)
have policies, procedures, and operational systems that presume a
stable NAV.
\16\ The OCC would expect banks to normalize and treat stable
NAVs operating at a multiple of a $1.00 (e.g., $10 NAV) or fraction
of $1.00 (e.g., $0.5) as operating with a NAV of $1.00 per
participating interest.
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B. Section 9.18(b)(4)(iii)(B)
The current STIF Rule requires the bank managing the STIF \17\ to
maintain a dollar-weighted average portfolio maturity of 90 days or
less. The current STIF Rule restricts the weighted average maturity of
the STIF's portfolio in order to limit the exposure of participating
fiduciary accounts to certain risks, including interest rate risk. The
proposed rule would change the maturity limits to further reduce such
risks. First, the proposal would reduce the maximum weighted average
portfolio maturity permitted by the rule from 90 days or less to 60
days or less. Second, it would establish a new
[[Page 21060]]
maturity test that would limit the portion of a STIF's portfolio that
could be held in longer term variable- or floating-rate securities.
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\17\ The current STIF Rule incorporates this and other measures
through requirements that the Plan include provisions requiring the
bank administering the STIF to effectuate the measures with respect
to the STIF. The revisions proposed herein incorporate additional
measures through requirements that the Plan include provisions
requiring the STIF to observe certain restrictions and adopt certain
procedures. In either case, it is effectively the bank administering
the STIF that generally performs these measures, and for convenience
purposes, the Supplementary Information section herein will describe
it that way.
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1. Dollar-Weighted Average Portfolio Maturity
The proposal would amend the ``dollar-weighted average portfolio
maturity'' \18\ requirement of the STIF Rule to 60 days or less.
Currently, banks managing STIFs must maintain a dollar-weighted average
portfolio maturity of 90 days or less.\19\ Securities that have shorter
periods remaining until maturity generally exhibit a lower level of
price volatility in response to interest rate and credit spread
fluctuations and, thus, provide a greater assurance that the STIF will
continue to maintain a stable value.
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\18\ Generally, ``dollar-weighted average portfolio maturity''
means the average time it takes for securities in a portfolio to
mature, weighted in proportion to the dollar amount that is invested
in the portfolio. Dollar-weighted average portfolio maturity
measures the price sensitivity of fixed-income portfolios to
interest rate changes.
\19\ 12 CFR 9.18(b)(4)(ii)(B)(1).
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Having a portfolio weighted towards securities with longer
maturities poses greater risks to participating accounts in a STIF. For
example, a longer dollar-weighted average maturity period increases a
STIF's exposure to interest rate risk. Additionally, longer maturity
periods amplify the effect of widening credit spreads on a STIF.
Finally, a STIF holding securities with longer maturity periods
generally is exposed to greater liquidity risk because: (1) Fewer
securities mature and return principal on a daily or weekly basis to be
available for possible fiduciary account withdrawals, and (2) the fund
may experience greater difficulty in liquidating these securities in a
short period of time at a reasonable price.
STIFs with a shorter portfolio maturity period would be better able
to withstand increases in interest rates and credit spreads without
material deviation from amortized cost. Furthermore, in the event
distress in the short-term instrument market triggers increasing rates
of withdrawals from STIFs, the STIFs would be better positioned to
withstand such withdrawals as a greater portion of their portfolios
mature and return principal on a daily or weekly basis and would have
greater ability to liquidate a portion of their portfolio at a
reasonable price.
Question 1: What are the estimates of the effects, if any, on STIF
portfolios and participating accounts from reducing the maximum dollar-
weighted average portfolio maturity permitted by the rule from 90 to 60
days? The OCC seeks commenters' specific information about the risk
sensitivities associated with current STIF portfolios, including the
current and month-end dollar-weighted average maturity of these funds
since 2008.
2. Weighted Average Portfolio Life Maturity
The proposal would add a new maturity requirement for STIFs, which
would limit the dollar-weighted average portfolio life maturity to 120
days or less. The dollar-weighted average portfolio life maturity would
be measured without regard to a security's interest rate reset dates
and, thus, would limit the extent to which a STIF could invest in
longer term securities that may expose it to increased liquidity and
credit risk.
To determine compliance with the dollar-weighted average portfolio
maturity requirement of the current STIF Rule, banks generally treat
the maturity of a portfolio security as the period remaining until the
date on which the principal must unconditionally be repaid according to
its terms (its final ``legal'' maturity) or, in the case of a security
called for redemption, the date on which the redemption payment must be
made. However, banks treat certain types of securities, such as certain
floating or adjustable-rate securities, as having shorter maturities
equal to the time remaining to the next interest rate reset date.\20\
As a result, STIFs may treat longer term adjustable-rate securities as
short-term securities. While adjustable-rate securities held in these
funds do tend to protect a STIF against changes in interest rates, they
do not fully protect against credit and liquidity risk to the
portfolio.
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\20\ See infra note 22 and accompanying text.
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The traditional dollar-weighted average portfolio maturity
measurement in the current STIF Rule does not require a STIF to limit
these risks. For this reason, the proposal would impose a new dollar-
weighted average portfolio life maturity limitation on the structure of
a STIF to capture credit and liquidity risk not encompassed by the
dollar-weighted average portfolio maturity restriction. The proposal
would require that STIFs maintain a dollar-weighted average portfolio
life maturity of 120 days or less, which would provide a reasonable
balance between strengthening the resilience of STIFs to credit and
liquidity risk while not unduly restricting the bank's ability to
invest the STIF's fiduciary assets in a diversified portfolio of short-
term, high quality debt securities.
The impact of a limit on the dollar-weighted average life of a
portfolio would be on those STIFs that hold certain longer term
floating-rate securities. For example, under the current STIF Rule, a
STIF with a portfolio comprising 50 percent of overnight repurchase
agreements and 50 percent of two-year government agency floating-rate
obligations that reset daily based on the federal funds rate would have
a dollar-weighted average portfolio maturity of one day. In contrast,
by applying a measurement that does not recognize resets, the portfolio
would have a dollar-weighted average portfolio life maturity of 365.5
days (i.e., half of the portfolio has a one day maturity and half has a
two-year maturity), which would be considerably longer than the 120-day
limit of the proposal. Thus, the dollar-weighted average portfolio life
maturity limitation would provide an extra layer of protection for
qualified account participants against credit and liquidity risk,
particularly in volatile markets.
Question 2: What are the effects, if any, on STIF portfolios and
participating accounts of limiting the portion of a fund's portfolio
that may be held in longer term variable- or floating-rate securities?
The OCC seeks commenters' specific information about the risk
sensitivities associated with the current dollar-weighted average life
maturity of these funds.
3. Determination of Maturity Limits
In determining the dollar-weighted average portfolio maturity of
STIFs under the current rule, national banks generally apply the same
methodology as required by the SEC for MMMFs pursuant to Rule 2a-7.
Dollar-weighted average maturity under Rule 2a-7 is calculated, as a
general rule, by treating each security's maturity as the period
remaining until the date on which, in accordance with the terms of the
security, the principal amount must be unconditionally paid or, in the
case of a security called for redemption, the date on which the
redemption payment must be made. Rule 2a-7 also provides eight
exceptions to this general rule. For example, for certain types of
variable-rate securities, the date of maturity may be the earlier of
the date of the next interest rate reset or the period remaining until
the principal can be recovered through demand. For repurchase
agreements, the maturity is the date on which the repurchase is
scheduled to occur, unless the repo is subject to demand for
repurchase, in which case the maturity is the notice
[[Page 21061]]
period applicable to demand.\21\ The proposal would include this
approach in the rule text for dollar-weighted average portfolio
maturity and dollar-weighted average portfolio life maturity \22\ for
ease of administration and implementation of the proposed rule's
requirements.
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\21\ See 17 CFR 270.2a-7(d)(1)-(8).
\22\ The SEC's Rule 2a-7 adopting release describes the new
weighted average life maturity calculation as being based on the
same methodology as the weighted average maturity determination, but
made without reference to the set of maturity exceptions the rule
permits for certain interest rate readjustments for specified types
of assets under the rule. 17 CFR 270.2a-7(c)(2)(iii). The OCC is
proposing the same maturity calculation, referring to it as the
dollar-weighted average portfolio life maturity. The calculation
bases a security's maturity on its stated final maturity date or,
when relevant, the date of the next demand feature when the fund may
receive payment of principal and interest (such as a put feature).
See 75 FR 10072 (Mar. 4, 2010) at footnote 154 and accompanying
text.
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Question 3: Is this approach for the determination of maturity
limits appropriate, and if not, what alternative approach should be
used?
C. Section 9.18(b)(4)(iii)(E)
To ensure that banks managing STIFs include practices designed to
limit the amount of credit and liquidity risk to which participating
accounts in STIFs are exposed, the proposal would require adoption of
portfolio and issuer qualitative standards and concentration
restrictions. The OCC would expect bank fiduciaries to identify,
monitor, and manage issuer and lower quality investment concentrations
and implement procedures to perform appropriate due diligence on all
concentration exposures as part of the bank's risk management policies
and procedures for each STIF. In addition to standards imposed by
applicable law, the portfolio and issuer qualitative standards and
concentration restrictions should take into consideration market events
and deterioration in an issuer's financial condition.
Question 4: Are defined portfolio concentration limits necessary in
order for STIF managers and STIF participants to ensure that a fund has
reduced its credit exposure to a specific issuer? Commenters who assert
that portfolio concentration limits are necessary should provide
details regarding the percent limits for specific issuers or classes of
issuers.
D. Section 9.18(b)(4)(iii)(F)
Many banks process STIF withdrawal requests within a short time
frame, often on the same day that the withdrawal request is received,
which necessitates sufficient liquidity to meet such requests. By
holding illiquid securities, a STIF exposes itself to the risk that it
will be unable to satisfy withdrawal requests promptly without selling
illiquid securities at a loss that, in turn, could impair its ability
to maintain a stable NAV. Moreover, illiquid securities are generally
subject to greater price volatility, exposing the STIF to greater risk
that its mark-to-market value will deviate from its amortized cost
value. To address this concern, the proposal would require adoption of
standards that include provisions to address contingency funding needs.
E. Section 9.18(b)(4)(iii)(G)
The proposal would require a bank managing a STIF to adopt shadow
pricing procedures.\23\ These procedures require the bank to calculate
the extent of the difference, if any, between the mark-to-market NAV
per participating interest using available market quotations (or an
appropriate substitute that reflects current market conditions) from
the STIF's amortized cost value per participating interest. In the
event the difference exceeds $0.005 per participating interest,\24\ the
bank must take action to reduce dilution of participating interests or
other unfair results to participating accounts in the STIF, such as
ceasing fiduciary account withdrawals. The shadow pricing procedures
must occur at least on a calendar week basis and more frequently as
determined by the bank when market conditions warrant.
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\23\ Shadow pricing is the process of maintaining two sets of
valuation records--one that reflects the value of a fund's assets at
amortized cost and the other that reflects the market value of the
fund's assets.
\24\ The proposal contemplates a stable NAV of $1.00. If a STIF
has a stable NAV that is different than $1.00 it must adjust the
reference value accordingly.
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Question 5: Does the proposal differ from banks' current pricing
practices? If so, how? Question 6: Is the proposed weekly shadow
pricing frequency appropriate? Question 7: Would another reporting
frequency be more appropriate and, if so, what frequency and why?
F. Section 9.18(b)(4)(iii)(H)
The proposal would require a bank managing a STIF to adopt
procedures for stress testing the fund's ability to maintain a stable
NAV for participating interests. The proposal would require the stress
tests be conducted at such intervals as an independent risk manager or
a committee responsible for the STIF's oversight determines to be
appropriate and reasonable in light of current market conditions, but
in no case shall the interval be longer than a calendar month-end
basis. The independent risk manager or committee members must be
independent from the STIF's investment management. The stress testing
would be based upon hypothetical events (specified by the bank) that
include, but are not limited to, a change in short-term interest rates;
an increase in participating account withdrawals; a downgrade of or
default on portfolio securities; and the widening or narrowing of
spreads between yields on an appropriate benchmark the fund has
selected for overnight interest rates and commercial paper and other
types of securities held by the fund.
The proposal provides a bank with flexibility to specify the
scenarios or assumptions on which the stress tests are based, as
appropriate to the risk exposures of each STIF. Banks managing STIFs
should, for example, consider procedures that require the fund to test
for the concurrence of multiple hypothetical events, e.g., where there
is a simultaneous increase in interest rates and substantial
withdrawals.\25\
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\25\ Where stress testing models are relied upon, a bank should
validate the models consistent with the Supervisory Guidance on
Model Risk Management issued by the OCC and the Board of Governors
of the Federal Reserve System. See OCC Bulletin 2011-12 (Apr. 4,
2011).
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The proposal also would require a stress test report be provided to
the independent risk manager or the committee responsible for the
STIF's oversight. The report would include: (1) The date(s) on which
the testing was performed; (2) the magnitude of each hypothetical event
that would cause the difference between the STIF's mark-to-market NAV
calculated using available market quotations (or appropriate
substitutes which reflect current market conditions) and its NAV per
participating interest calculated using amortized cost to exceed
$0.005; and (3) an assessment by the bank of the STIF's ability to
withstand the events (and concurrent occurrences of those events) that
are reasonably likely to occur within the following year.
In addition, the proposal would require that adverse stress testing
results are reported to the bank's senior risk management that is
independent from the STIF's investment management.
The proposed stress testing procedures would provide banks with a
better understanding of the risks to which STIFs are exposed and would
give banks additional information that can be used for managing those
risks.
Question 8: Is the proposed requirement that a STIF adopt
procedures for stress testing the fund's
[[Page 21062]]
ability to maintain a stable NAV for participating interests
appropriate? Why so or why not? Question 9: In particular, is the
proposed monthly stress testing frequency appropriate? Commenters who
assert that another frequency would be more appropriate should identify
the alternative and provide a supporting rationale.
G. Section 9.18(b)(4)(iii)(I)
The proposal would require banks managing STIFs to disclose
information about fund level portfolio holdings to STIF participants
and to the OCC within five business days after each calendar month-end.
Specifically, the bank would be required to disclose the STIF's total
assets under management (securities and other assets including cash,
minus liabilities); the fund's mark-to-market and amortized cost NAVs,
both with and without capital support agreements; the dollar-weighted
average portfolio maturity; and dollar-weighted average portfolio life
maturity as of the last business day of the prior calendar month. The
current STIF Rule does not contain a similar disclosure requirement.
Also, for each security held by the STIF, as of the last business
day of the prior calendar month, the bank would be required to disclose
to STIF participants and to the OCC within five business days after
each calendar month-end at a security level: (1) The name of the
issuer; (2) the category of investment; (3) the Committee on Uniform
Securities Identification Procedures (CUSIP) number or other standard
identifier; (4) the principal amount; (5) the maturity date for
purposes of calculating dollar-weighted average portfolio maturity; (6)
the final legal maturity date (taking into account any maturity date
extensions that may be effected at the option of the issuer) if
different from the maturity date for purposes of calculating dollar-
weighted average portfolio maturity; (7) the coupon or yield; and (8)
the amortized cost value.
Question 10: What is the estimate of the burden, if any, associated
with the proposed security level disclosures to STIF participants,
specifically, whether details about every security in the fund should
be disclosed? Question 11: What disclosure formats could accomplish the
disclosure objective efficiently? Question 12: What would be the
impacts on tax-qualified STIF participants of monthly, detailed
security-level disclosures from the STIF, including how STIF
participants might use the disclosed information?
H. Section 9.18(b)(4)(iii)(J)
The proposal would require a bank that manages a STIF to notify the
OCC prior to or within one business day after certain events. Those
events are: (1) Any difference exceeding $0.0025 between the NAV and
the mark-to-market value of a STIF participating interest based on
current market factors; (2) when a STIF has re-priced its NAV below
$0.995 per participating interest; (3) any withdrawal distribution-in-
kind of the STIF's participating interests or segregation of portfolio
participants; (4) any delays or suspensions in honoring STIF
participating interest withdrawal requests; (5) any decision to
formally approve the liquidation, segregation of assets or portfolios,
or some other liquidation of the STIF; and (6) when a national bank,
its affiliate, or any other entity provides a STIF financial support,
including a cash infusion, a credit extension, a purchase of a
defaulted or illiquid asset, or any other form of financial support in
order to maintain a stable NAV per participating interest.\26\ This
proposed requirement to notify the OCC prior to or within one business
day after these limited specific events would permit the OCC to more
effectively supervise STIFs that are experiencing liquidity or
valuation stress.
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\26\ See Interagency Policy on Banks/Thrifts Providing Financial
Support to Funds Advised by the Banking Organization or its
Affiliates, OCC Bulletin 2004-2 Attachment (Jan. 5, 2004)
(instructing banks that to avoid engaging in unsafe and unsound
banking practices, banks should adopt appropriate policies and
procedures governing routine or emergency transactions with bank
advised investment funds).
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To comply with this proposed requirement, a bank would have to
calculate the mark-to-market value of a STIF participating interest on
a daily basis.
Question 13: Is daily calculation of mark-to-market value of a STIF
participating interest a feasible or appropriate frequency to permit
effective monitoring and risk management by, and supervision of, STIFs
experiencing liquidity or valuation stress?
I. Section 9.18(b)(4)(iii)(K)
The proposal would require banks managing a STIF to adopt
procedures that in the event a STIF has re-priced its NAV below $0.995
per participating interest, the bank managing the STIF shall calculate,
redeem, and sell the STIF's participating interests at a price based on
the mark-to-market NAV. Currently, the rule creates an incentive for
withdrawal of participating interests if the mark-to-market NAV falls
below the stable NAV because the earlier withdrawals are more likely to
receive the full stable NAV payment. The proposal removes this
incentive, as once the NAV is priced below $0.995, all withdrawals of
participating interests will receive the mark-to-market NAV instead of
the stable NAV.
J. Section 9.18(b)(4)(iii)(L)
The proposal would require a bank managing a STIF to adopt
procedures for suspending redemptions and initiating liquidation of a
STIF as a result of redemptions. The intent of the proposal is to
reduce the vulnerability of participating accounts to the harmful
effects of extraordinary levels of withdrawals, which can be
accomplished to some degree by suspending withdrawals. These
suspensions only would be permitted in limited circumstances when, as a
result of redemption, the bank has: (1) Determined that the extent of
the difference between the STIF's amortized cost per participating
interest and its current mark-to-market NAV per participating interest
may result in material dilution of participating interests or other
unfair results to participating accounts; (2) formally approved the
liquidation of the STIF; and (3) facilitated the fair and orderly
liquidation of the STIF to the benefit of all STIF participants.
The OCC understands that suspending withdrawals may impose
hardships on fiduciary accounts for which the ability to redeem
participations is an important consideration. Accordingly, the proposed
requirement is limited to permitting suspension in extraordinary
circumstances when there is significant risk of extraordinary
withdrawal activity to the detriment of other participating accounts.
III. General Request for Comments
In addition to the specific requests for comment outlined in this
Supplementary Information section, the OCC is interested in receiving
comments on all aspects of this proposed rule.
IV. Community Bank Comment Request
The OCC also invites comments on the impact of this proposal on
community banks. The OCC recognizes that community banks operate with
more limited resources than larger institutions and may present a
different risk profile. Question 14: How would the proposal impact
community banks' current resources and available personnel with the
requisite expertise? Question 15: How could the goals of the proposal
be achieved for community banks through an alternative approach?
[[Page 21063]]
V. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the OCC to use
plain language in all proposed and final rules published after January
1, 2000. The OCC invites your comments on how to make this proposal
easier to understand. For example:
Question 16: Have we organized the material to suit your
needs? If not, how could this material be better organized?
Question 17: Are the requirements in the proposed
regulation clearly stated? If not, how could the regulation be more
clearly stated?
Question 18: Does the proposed regulation contain language
or jargon that is not clear? If so, which language requires
clarification?
Question 19: Would a different format (grouping and order
of sections, use of headings, paragraphing) make the regulation easier
to understand? If so, what changes to the format would make the
regulation easier to understand?
Question 20: What else could we do to make the regulation
easier to understand?
VI. Regulatory Analysis
A. Paperwork Reduction Act Analysis
Request for Comment on Proposed Information Collection
In accordance with section 3512 of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), the OCC may not conduct or
sponsor, and a 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 information collection
requirements contained in this notice of proposed rulemaking have been
submitted to OMB for review and approval under section 3506 of the PRA
and Sec. 1320.11 of OMB's implementing regulations (5 CFR part 1320)
as an amendment to the OCC's existing collection for Fiduciary
Activities (OMB Control No. 1557-0140). The information collection
requirements are found in Sec. Sec. 9.18(b)(4)(iii)(E)-(L).
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the OCC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments should
be addressed to: Communications Division, Office of the Comptroller of
the Currency, Public Information Room, Mailstop 2-3, Attention: 1557-
0140, 250 E Street SW., Washington, DC 20219. In addition, comments may
be sent by fax to 202-874-5274, or by electronic mail to
regs.comments@occ.treas.gov. You may personally inspect and photocopy
comments at the OCC, 250 E Street SW., Washington, DC 20219. 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 submit to security screening in order to inspect and
photocopy comments.
Additionally, please send a copy of your comments by mail to: OCC
Desk Officer, 1557-140, U.S. Office of Management and Budget, 725 17th
Street NW., 10235, Washington, DC 20503, or by fax to (202)
395-6974.
Proposed Information Collection
Title of Information Collection: Fiduciary Activities.
Frequency of Response: On occasion.
Affected Public: Businesses or other for-profit.
Respondents: National banks and federal branches and agencies of
foreign banks.
OMB Control No.: 1557-0140.
Abstract: The rule would allow an institution to value a STIF's
assets on a cost basis, rather than mark-to-market value for admissions
and withdrawals if the written plan requires the STIF to adopt certain
procedures and standards. These procedures and standards include:
Portfolio and issuer qualitative standards and restrictions; liquidity
standards; shadow pricing procedures; procedures for stress testing the
ability to maintain a stable NAV and the testing itself; procedures to
make certain disclosures for each security held and issuance of the
disclosures; procedures to require notification to OCC regarding
certain events; procedures regarding re-pricing events; and procedures
for suspending redemptions and initiating liquidation of a STIF.
Estimated Burden for the Amendment to the Collection:
Estimated Number of Respondents: 15 respondents administering 34
funds.
Estimated Burden per Fund: 846 hours.
Estimated Total Annual Burden: 28,764 hours.
B. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 603 of the RFA is not required if the agency
certifies that the proposed rule will not, if promulgated, have a
significant economic impact on a substantial number of small entities
(defined for purposes of the RFA to include banks and federal branches
and agencies with assets less than or equal to $175 million and trust
companies with assets less than or equal to $ 7 million) and publishes
its certification and a short, explanatory statement in the Federal
Register along with its proposed rule.
The Proposed Rule would have no impact on any small national banks
or federal branches and agencies or trust companies, as defined by the
RFA. No small national banks or federal branches and agencies report
management of STIFs on their required regulatory reports as of December
31, 2011. Therefore, the OCC certifies that the Proposed Rule would
not, if promulgated, have a significant economic impact on a
substantial number of small entities.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1532) requires the OCC to 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 in any one
year (adjusted annually for inflation). The OCC has determined that
this proposed rule will not result in expenditures by State, local, and
tribal governments, or the private sector, of $100 million or more in
any one year. Accordingly, the OCC has not prepared a budgetary impact
statement.
List of Subjects in 12 CFR Part 9
Estates, Investments, National banks, Reporting and recordkeeping
requirements, Trusts and trustees.
[[Page 21064]]
For the reasons set forth in the preamble, chapter I of title 12 of
the Code of Federal Regulations is proposed to be amended as follows:
PART 9--FIDUCIARY ACTIVITIES OF NATIONAL BANKS
1. The authority citation for part 9 continues to read as follows:
Authority: 12 U.S.C. 24(Seventh), 92a, and 93a; 12 U.S.C. 78q,
78q-1, and 78w.
2. Section 9.18 is amended by revising paragraph (b)(4)(ii) and by
adding paragraph (b)(4)(iii) to read as follows:
Sec. 9.18 Collective investment funds.
* * * * *
(b) * * *
(4) * * *
(ii) General Method of Valuation. Except as provided in paragraph
(b)(4)(iii) of this section, a bank shall value each fund asset at
mark-to-market value as of the date set for valuation, unless the bank
cannot readily ascertain mark-to-market value, in which case the bank
shall use a fair value determined in good faith.
(iii) Short-term investment funds (STIFs) Method of Valuation. A
bank may value a STIF's assets on a cost basis, rather than mark-to-
market value as provided in paragraph (b)(4)(ii) of this section, for
purposes of admissions and withdrawals, if the Plan includes
appropriate provisions, consistent with this part, requiring the STIF
to:
(A) Operate with a stable net asset value of $1.00 per
participating interest as a primary fund objective;
(B) Maintain a dollar-weighted average portfolio maturity of 60
days or less and a dollar-weighted average portfolio life maturity of
120 days or less as determined in the same manner as is required by the
Securities and Exchange Commission pursuant to Rule 2a-7 for money
market mutual funds (17 CFR 270.2a-7);
(C) Accrue on a straight-line or amortized basis the difference
between the cost and anticipated principal receipt on maturity;
(D) Hold the STIF's assets until maturity under usual
circumstances;
(E) Adopt portfolio and issuer qualitative standards and
concentration restrictions;
(F) Adopt liquidity standards that include provisions to address
contingency funding needs;
(G) Adopt shadow pricing procedures that:
(1) Require the bank to calculate the extent of difference, if any,
of the mark-to-market net asset value per participating interest using
available market quotations (or an appropriate substitute that reflects
current market conditions) from the STIF's amortized cost price per
participating interest, at least on a calendar week basis and more
frequently as determined by the bank when market conditions warrant;
and
(2) Require the bank, in the event the difference calculated
pursuant to this subparagraph exceeds $0.005 per participating
interest, to take action to reduce dilution of participating interests
or other unfair results to participating accounts in the STIF;
(H) Adopt procedures for stress testing the STIF's ability to
maintain a stable net asset value per participating interest that shall
provide for:
(1) The periodic stress testing, at least on a calendar month basis
and at such intervals as an independent risk manager or a committee
responsible for the STIF's oversight that consists of members
independent from the STIF's investment management determines
appropriate and reasonable in light of current market conditions;
(2) Stress testing based upon hypothetical events that include, but
are not limited to, a change in short-term interest rates, an increase
in participant account withdrawals, a downgrade of or default on
portfolio securities, and the widening or narrowing of spreads between
yields on an appropriate benchmark the STIF has selected for overnight
interest rates and commercial paper and other types of securities held
by the STIF;
(3) A stress testing report on the results of such testing to be
provided to the independent risk manager or the committee responsible
for the STIF's oversight that consists of members independent from the
STIF's investment management that shall include: the date(s) on which
the testing was performed; the magnitude of each hypothetical event
that would cause the difference between the STIF's mark-to-market net
asset value calculated using available market quotations (or
appropriate substitutes which reflect current market conditions) and
its net asset value per participating interest calculated using
amortized cost to exceed $0.005; and an assessment by the bank of the
STIF's ability to withstand the events (and concurrent occurrences of
those events) that are reasonably likely to occur within the following
year; and
(4) Reporting adverse stress testing results to the bank's senior
risk management that is independent from the STIF's investment
management.
(I) Adopt procedures that require a bank to disclose to STIF
participants and to the OCC's Asset Management Group, Credit & Market
Risk Division, Comptroller of the Currency, 250 E St. SW., Washington,
DC 20219-0001, within five business days after each calendar month-end,
the fund's total assets under management (securities and other assets
including cash, minus liabilities); the fund's mark-to-market and
amortized cost net asset values both with and without capital support
agreements; the dollar-weighted average portfolio maturity; the dollar-
weighted average portfolio life maturity of the STIF as of the last
business day of the prior calendar month; and for each security held by
the STIF as of the last business day of the prior calendar month:
(1) The name of the issuer;
(2) The category of investment;
(3) The Committee on Uniform Securities Identification Procedures
(CUSIP) number or other standard identifier;
(4) The principal amount;
(5) The maturity date for purposes of calculating dollar-weighted
average portfolio maturity;
(6) The final legal maturity date (taking into account any maturity
date extensions that may be effected at the option of the issuer) if
different from the maturity date for purposes of calculating dollar-
weighted average portfolio maturity;
(7) The coupon or yield; and
(8) The amortized cost value;
(J) Adopt procedures that require a bank that administers a STIF to
notify the Asset Management Group, Credit & Market Risk Division,
Comptroller of the Currency, 250 E St. SW., Washington, DC 20219-0001
prior to or within one business day thereafter of the following:
(1) Any difference exceeding $0.0025 between the net asset value
and the mark-to-market value of a STIF participating interest as
calculated using the method set forth in paragraph (b)(4)(iii)(G)(1) of
this section;
(2) When a STIF has re-priced its net asset value below $0.995 per
participating interest;
(3) Any withdrawal distribution-in-kind of the STIF's participating
interests or segregation of portfolio participants;
(4) Any delays or suspensions in honoring STIF participating
interest withdrawal requests;
(5) Any decision to formally approve the liquidation, segregation
of assets or portfolios, or some other liquidation of the STIF; or
(6) In those situations when a bank, its affiliate, or any other
entity provides a STIF financial support, including a cash infusion, a
credit extension, a purchase of a defaulted or illiquid asset, or any
other form of financial support in
[[Page 21065]]
order to maintain a stable net asset value per participating interest;
(K) Adopt procedures that in the event a STIF has re-priced its net
asset value below $0.995 per participating interest, the bank
administering the STIF shall calculate, redeem, and sell the STIF's
participating interests at a price based on the mark-to-market net
asset value; and
(L) Adopt procedures that, in the event a bank suspends or limits
withdrawals and initiates liquidation of the STIF as a result of
redemptions, require the bank to:
(1) Determine that the extent of the difference between the STIF's
amortized cost per participating interest and its mark-to-market net
asset value per participating interest may result in material dilution
of participating interests or other unfair results to participating
accounts;
(2) Formally approve the liquidation of the STIF; and
(3) Facilitate the fair and orderly liquidation of the STIF to the
benefit of all STIF participants.
* * * * *
Dated: April 2, 2012.
John Walsh,
Acting Comptroller of the Currency.
[FR Doc. 2012-8467 Filed 4-6-12; 8:45 am]
BILLING CODE P