[Federal Register Volume 77, Number 120 (Thursday, June 21, 2012)]
[Rules and Regulations]
[Pages 37265-37283]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15004]



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Federal Register / Vol. 77, No. 120 / Thursday, June 21, 2012 / Rules 
and Regulations

[[Page 37265]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 32, 159 and 160

[Docket ID OCC-2012-0007]
RIN 1557-AD59


Lending Limits

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Interim final rule and request for comments.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
amending its regulation governing lending limits for national banks to 
consolidate the lending limit rules applicable to national banks and 
savings associations and remove its separate regulation governing 
lending limits for savings associations. The OCC also is amending its 
rules to implement section 610 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, which amends the statutory definition of 
``loans and extensions of credit'' to include credit exposures arising 
from derivative transactions, repurchase agreements, reverse repurchase 
agreements, securities lending transactions and securities borrowing 
transactions. Pursuant to the OCC's authority in section 5200(d) of the 
Revised Statutes, the OCC is amending the lending limit rules to 
provide a temporary exception for the transactions covered by section 
610 until January 1, 2013, in order to allow institutions a sufficient 
period to make adjustments to assure compliance with the new 
requirements.

DATES: This interim final rule is effective on July 21, 2012, except 
that amendatory instruction 3a amending Sec.  32.2 is effective January 
1, 2013. Comments must be received by August 6, 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 ``Lending Limits'' 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 ``Interim Final Rule'', and in ``By Keyword or 
ID'' box, enter Docket ID ``OCC-2012-0007'', and click ``Search''. If 
rules for more than one agency are listed, in the ``Agency'' column, 
locate the interim final rule 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-2012-0007'' 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 interim final rule 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-2012-0007'', 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: Jonathan Fink, Assistant Director, 
Bank Activities and Structure Division, (202) 874-5300; Heidi M. 
Thomas, Special Counsel, Legislative and Regulatory Activities 
Division, (202) 874-5090; or Kurt Wilhelm, Director for Financial 
Markets, (202) 874-4479.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 5200 of the Revised Statutes, 12 U.S.C. 84, provides that 
the total loans and extensions of credit by a national bank to a person 
outstanding at one time shall not exceed 15 percent of the unimpaired 
capital and unimpaired surplus of the bank if the loan is not fully 
secured, plus an additional 10 percent of unimpaired capital and 
unimpaired surplus if the loan is fully secured. Section 5(u)(1) of the 
Home Owners' Loan Act (HOLA), 12 U.S.C. 1464(u)(1), provides that 
section 5200 of the Revised Statutes ``shall apply to savings 
associations in the same manner and to the same extent as it applies to

[[Page 37266]]

national banks.'' In addition, section 5(u)(2) of HOLA, 12 U.S.C. 
1464(u)(2), includes exceptions to the lending limits for certain loans 
made by savings associations. These HOLA provisions apply to both 
Federal and state-chartered savings associations.
    OCC regulations at 12 CFR parts 32 and 160.93 implement these 
statutes for national banks and state and Federal savings 
associations,\1\ respectively. Section 160.93 specifically applies 12 
U.S.C. 84 and the lending limit regulations and interpretations 
promulgated by the OCC for national banks to Federal and state savings 
associations. Section 160.93 also implements specific statutory lending 
limit exceptions unique to Federal and state savings associations.
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    \1\ The OCC has rulemaking authority for lending limit 
regulations applicable to national banks and to all savings 
associations, both state- and Federally-chartered. However, the 
FDIC, not the OCC, is the appropriate Federal banking agency for 
state savings associations and enforces these rules as to state 
savings associations.
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    Section 610 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (Dodd-Frank 
Act), amends section 5200 of the Revised Statutes \2\ to provide that 
the definition of ``loans and extensions of credit'' includes any 
credit exposure to a person arising from a derivative transaction, 
repurchase agreement, reverse repurchase agreement, securities lending 
transaction, or securities borrowing transaction between a national 
bank and that person. This amendment is effective July 21, 2012. By 
virtue of section 5(u)(1) of the HOLA, this new definition of ``loans 
and extensions of credit'' applies to all savings associations as well 
as to national banks.
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    \2\ 12 U.S.C. 84.
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II. Description of the Interim Final Rule

A. Integration of Savings Associations

    This interim final rule amends part 32 to consolidate the lending 
limit rules applicable to national banks and savings associations. 
Specifically, the interim final rule amends the authority section, 
Sec.  32.1(a), to include relevant statutory citations for savings 
associations; amends the scope section, Sec.  32.1(c), to include 
savings associations; inserts the term ``savings association'' 
elsewhere throughout the rule where necessary; and replaces ``OCC'' or 
``Comptroller'' with ``appropriate Federal banking agency,'' as 
appropriate. The rule defines ``appropriate Federal banking agency'' as 
having the same meaning as in 12 U.S.C. 1813(q). For purposes of part 
32, therefore, ``appropriate Federal banking agency'' means the OCC in 
the case of a national bank or Federal savings association, and the 
Federal Deposit Insurance Corporation (FDIC) in the case of a state 
savings association. The OCC also is removing 12 CFR 160.93 as no 
longer necessary in light of this consolidation. These changes will 
eliminate duplication and create efficiencies by establishing a single 
set of lending limit rules for national banks and savings associations, 
without substantially changing the requirements.
    Certain statutory provisions apply only to savings associations, 
and the interim final rule amends part 32 by adding Sec.  32.3(d) to 
account for these statutory exceptions, which are included in current 
Sec.  160.93. First, 12 U.S.C. 1464(u)(2)(A)(i) permits a savings 
association to make loans to one borrower in an amount not to exceed 
$500,000, even if its limit as calculated under section 84 would be 
lower. Second, 12 U.S.C. 1464(u)(2)(A)(ii) prescribes a specific 
lending limit to develop domestic residential housing units provided 
certain conditions are met. This latter exception as included in the 
interim final rule differs from the provision in Sec.  160.93 in that 
it incorporates a change made by section 404 of the Financial Services 
Regulatory Relief Act of 2006, which removed from 12 U.S.C. 
1464(u)(2)(A)(ii) the requirement that the final purchase price of each 
single family dwelling unit not exceed $500,000.
    To complement the inclusion of these exception, the interim final 
rule adds an appendix to part 32 that is substantively identical to the 
current appendix to Sec.  160.93 and that provides further 
interpretation of the domestic residential housing unit development 
exception. The interim final rule also adds to Sec.  32.2 the 
definition of ``residential housing units,'' a term used in this 
exception and included in Sec.  160.93(b).
    In addition, the interim final rule carries over in new Sec.  
32.3(d)(3) the provision now contained in Sec.  160.93(d)(5),\3\ which 
provides that notwithstanding the lending limit, a Federal savings 
association may invest up to 10 percent of unimpaired capital and 
unimpaired surplus in obligations of one issuer evidenced by commercial 
paper or corporate debt securities that are, as of the date of 
purchase, investment grade.\4\
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    \3\ As part of the integration of bank and savings association 
rules, the OCC is considering whether to revise part 1 to include 
savings associations, in which case we will move this provision for 
savings associations from part 32 to part 1.
    \4\ The OCC recently revised Sec.  160.93 in its rulemaking to 
implement section 939A of the Dodd-Frank Act by adopting 
alternatives to the use of external credit ratings. See 77 FR 35253 
(June 13, 2012).
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    The interim final rule also deletes the current provision at Sec.  
160.93(h), which states that the OCC may impose more stringent 
restrictions on a Federal savings association's loans to one borrower 
if the agency determines that such restrictions are necessary to 
protect the safety and soundness of the savings association, since this 
provision simply repeats section 5(u)(3) of HOLA, 12 U.S.C. 1464(u)(3). 
The OCC also has authority to take action to prevent any type of unsafe 
or unsound lending practice by a savings association (or a national 
bank) on a case-by-case basis, and the OCC's broad authority under 12 
U.S.C. 84(d)(1) to establish lending limits applicable to particular 
categories or classes of loans or extensions of credit broadly 
authorizes adjustments to the lending limits across types of loans and 
types of institutions. Furthermore, Sec.  32.1(c)(4), as revised, 
provides that loans and extensions of credit made by national banks, 
savings associations, and their domestic operating subsidiaries must be 
consistent with safe and sound banking practices.
    The treatment of financed sales of bank assets in part 32, Sec.  
32.2(k)(2)(iii), and the provision now contained in the savings 
association rule, Sec.  160.93(e), addressing the financed sale of real 
property acquired in satisfaction of debts previously contracted (DPC 
property) are comparable. Specifically, current Sec.  32.2(k)(2)(iii) 
provides that the financed sale of bank assets is not treated as a loan 
for purposes of the lending limit if the financing does not place the 
bank in a worse position than when the bank held title to the assets. 
Section 160.93(e) applies the same treatment to the financed sale of 
DPC property. The final rule incorporates savings associations into the 
part 32 provision, renumbered as Sec.  32.2(q)(2)(iii) by this interim 
final rule. While the scope of the national bank rule is somewhat 
broader, covering the financed sale of all bank assets and not just DPC 
property, the financed sale of other bank assets, subject to the 
existing requirement that the sale not place the bank in a worse 
position, is consistent with safety and soundness considerations. OCC 
supervisory experience does not indicate that exempting the financed 
sale of all bank assets from the general lending limit, where the sale 
does not place the bank in a worse position, has been a problem at 
national banks, and therefore the interim final rule applies such 
treatment to the financed sale of a savings

[[Page 37267]]

association's assets. Accordingly, under the interim final rule, 
financed sales of a savings association's own assets, including Other 
Real Estate Owned, do not constitute loans or extensions of credit if 
the financing does not put the institution in a worse position than 
when it held title to the assets. Financed sales that put the savings 
association in a worse position than when it held title to the assets 
are subject to the general combined limit set forth in Sec.  32.3(a). 
This treatment is consistent with Sec.  160.93(e).
    The interim final rule also revises the scope provision in part 32. 
Current Sec.  32.1(c) excludes loans made to affiliates, operating 
subsidiaries, or Edge Act or Agreement Corporation subsidiaries. The 
amendment incorporates the exclusion in Sec.  160.93(a) of loans to 
certain savings association service corporations. It also broadens in 
some respects the exclusion for loans to certain subsidiaries of 
national banks. As amended, the exclusion also will apply to loans to 
any subsidiary consolidated with the bank under Generally Accepted 
Accounting Principles (GAAP).
    Question 1: Has the OCC appropriately addressed the applicability 
of the lending limit to loans made to subsidiaries with respect to the 
amendments made to the scope section?
    Under the interim final rule, savings associations are required to 
calculate their lending limits in accordance with the rules set forth 
in Sec.  32.4. Although stated differently in Sec.  160.93(f), the 
calculation rule for a national banks and savings associations lending 
limit produces the same result. Section 32.4 provides that a national 
bank shall calculate its lending limit as of (1) the most recent of the 
last day of the preceding calendar quarter (effective as of the earlier 
of the date on which the bank's Consolidated Reports of Condition and 
Income (Call Report) is submitted or the date it is required to be 
submitted) or (2) the date on which there is a change in the bank's 
capital category (effective when the lending limit is to be 
calculated.) The OCC may require more frequent calculations for safety 
and soundness reasons. The current rule for savings associations, set 
forth at Sec.  160.93(f), provides for the savings association to 
calculate its lending limit as of the most recent periodic report 
required to be filed prior to the date of the loan unless the savings 
association knows or has reason to know of a significant change 
subsequent to filing the report. Under Sec.  160.93(f), the most recent 
periodic report is the savings association's Call Report, which is 
filed, as with national banks, for each calendar quarter. A 
``significant change'' would include a change in the savings 
association's capital category. Therefore, there is no substantive 
difference in how a savings association will calculate its lending 
limit under the interim final rule.
    Part 32 and Sec.  160.93 differ in certain respects and there are 
some differences that are not being incorporated into part 32. First, 
the scope of part 32 is narrower than that of Sec.  160.93. Part 32 
applies the lending limit restrictions to loans and extensions of 
credit made by national banks and their domestic operating 
subsidiaries. The lending limit restrictions in current Sec.  160.93 
apply to loans made by savings associations and all their subsidiaries.
    Question 2: Has the OCC appropriately addressed the applicability 
of the lending limit to loans made by subsidiaries of savings 
associations by narrowing the scope of the rule to domestic operating 
subsidiaries?
    Second, Sec.  160.93(f) requires savings associations to document 
their lending limit compliance if the loan is greater than $500,000 or 
5 percent of unimpaired capital and unimpaired surplus. The interim 
final rule does not include this unique documentation requirement in 
part 32. Consistent with safe and sound banking practices, institutions 
should always maintain documentation showing compliance with the 
lending limit.
    The interim final rule also makes a clarifying change to Sec.  
32.7, Residential real estate loans, small business loans, and small 
farm loans, by amending the title of this section to reference the 
``Supplemental Lending Limits Program,'' and by replacing the phrase 
``special lending limits'' with ``supplemental lending limits'' 
throughout the section. This conforms Sec.  32.7 to the terminology 
currently used by the OCC.

B. Section 610 of the Dodd-Frank Act

    The interim final rule amends part 32 to implement section 610 of 
the Dodd-Frank Act. Section 610 amends section 5200(b) of the Revised 
Statutes \5\ to provide that the definition of ``loans and extensions 
of credit'' includes any credit exposure to a person arising from a 
derivative transaction, repurchase agreement, reverse repurchase 
agreement, securities lending transaction, or securities borrowing 
transaction between a national bank and the person. Section 610 also 
amends section 5200(b) by adding a definition of ``derivative 
transaction'' to include any transaction that is a contract, agreement, 
swap, warrant, note, or option that is based, in whole or in part, on 
the value of, any interest in, or any quantitative measure or the 
occurrence of any event relating to, one or more commodities, 
securities, currencies, interest or other rates, indices, or other 
assets. These amendments are effective July 21, 2012, two years after 
enactment of the Dodd-Frank Act.
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    \5\ 12 U.S.C. 84(b).
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    Section 610 adds to the scope and complexity of the lending limits. 
To implement these new requirements, the interim final rule amends the 
definition of ``loans and extensions of credit'' in Sec.  32.2, to 
include certain credit exposure arising from a derivative transaction 
or a securities financing transaction. A securities financing 
transaction is defined as a repurchase agreement, reverse repurchase 
agreement, securities lending transaction, or securities borrowing 
transaction. The interim final rule also removes current Sec.  
32.2(k)(1)(iii), which excludes repurchase agreements for Type I 
securities from the definition of loan or extension of credit. Instead, 
it adds a provision, set forth at Sec.  32.3(c)(11) and explained 
below, that exempts credit exposure arising from securities financing 
transactions involving Type I securities for all securities financing 
transactions.\6\
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    \6\ We note, however, that the deletion of current Sec.  
32.2(k)(1)(iii), renumbered as Sec.  32.2(q)(1)(vii) in the interim 
final rule, is effective as of January 1, 2013, the date new Sec.  
32.3(c)(11) takes effect pursuant to new Sec.  32.1(d), discussed 
below.
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    The interim final rule also adds a definition of ``derivative 
transaction'' as new paragraph (k) of Sec.  32.2 that mirrors the 
definition added to section 5200 of the Revised Statutes by section 
610. To complement these changes, it amends the definition of 
``borrower,'' redesignated as Sec.  32.2(b), to include a party to whom 
the bank has credit exposure arising from a derivative transaction or a 
securities financing transaction. It also amends Sec.  32.2 to add the 
definitions of ``credit derivative,'' ``qualifying central 
counterparty,'' and ``qualifying master netting agreement,'' all 
defined as in current 12 CFR part 3, as well as ``effective margining 
arrangement,'' ``eligible credit derivative,'' and ``eligible 
protection provider.'' These terms are used in new Sec.  32.9, as 
described below.
    Question 3: Are these terms adequately defined? Are there other 
terms we should define in part 32 to help implement section 610 of the 
Dodd-Frank Act?
    Section 610 does not provide guidance on how to measure the

[[Page 37268]]

fluctuating credit exposure of derivative transactions and securities 
financing transactions for purposes of the lending limit. In order to 
reduce the practical burden of such calculations, particularly for 
smaller and mid-size banks and savings associations, the OCC is 
providing different options for measuring the appropriate exposures in 
new Sec.  32.9, as discussed below. The OCC believes these alternatives 
implement the statutory changes, consistent with safety and soundness 
and the goals of the statute, in a manner that seeks to reduce 
unnecessary new regulatory burden.
1. Derivative Transactions
    The ``credit exposure'' arising from a derivative transaction is 
commonly viewed as the sum of the current credit exposure on the 
contract or portfolio plus some measure of potential future exposure 
(PFE). Under the interim final rule, the ``current credit exposure'' is 
determined by the mark-to-market value (MTM) of the derivative 
contract. The current MTM is generally zero at execution of the 
contract. Subsequent to the execution of the contract, if the MTM value 
is positive, then the current credit exposure equals that MTM value. If 
the MTM value is zero or negative, than the current credit exposure is 
zero. This current credit exposure determination is the same as that 
included in the capital rules at 12 CFR part 3, Appendix A, Sec.  
3(b)(7)(A).
    PFE, on the other hand, recognizes the possibility that the MTM 
amount may increase over time, based upon changes in market factors. 
The PFE, when added to the MTM amount, can be viewed as the anticipated 
ceiling of credit exposure at the execution of a derivative 
transaction.
    The interim final rule provides three methods for calculating 
credit exposure of derivative transactions other than credit 
derivatives. Unless required to use a specific method by the 
appropriate Federal banking agency pursuant to Sec.  32.9(b)(3), a 
national bank or savings association may choose which of these methods 
it will use. However, a national bank or savings association must use 
the same method for calculating credit exposure arising from all 
derivative transactions. Examples of these three approaches are 
reflected in the Explanatory Table that appears in section 4 of this 
preamble.
    Question 4: Is the requirement to use the same method when 
calculating credit exposure for all non-credit derivative transactions 
appropriate? Should institutions be allowed to use a different method 
for different types of transactions or for the same transaction type 
but different parties?
    Under the first method, the ``Internal Model Method,'' national 
banks and savings associations may model their exposures via an 
internal model approved by the OCC. Under this method, the counterparty 
credit exposure of a derivative transaction will be measured by a model 
that estimates a credit exposure amount, inclusive of the current MTM. 
A bank or savings association using this approach should calculate its 
exposure by using the internal model that it considers most appropriate 
in evaluating the risk associated with derivative transactions. The 
model must have been approved for purposes of section 53 of the 
Advanced Approaches Appendices of the appropriate Federal banking 
agencies' capital rules, 12 CFR part 3, Appendix C for national banks; 
12 CFR part 167, Appendix C for Federal savings associations; and 12 
CFR 390, subpart Z, Appendix A for state savings associations, or be 
another appropriate model approved by the appropriate Federal banking 
agency. A national bank or savings association that elects to calculate 
its credit exposure by using the Internal Model Method will be 
permitted to net credit exposure of derivative transactions arising 
under the same qualifying master netting agreement, thereby reducing 
the institution's exposure to the borrower to the net exposure under 
the master netting agreement.
    Question 5: Would it be more appropriate to require that national 
banks and savings associations use other models instead of the one 
included in part 3?
    Second, pursuant to Sec.  32.9(b)(1)(ii), a national bank or 
savings association may choose to measure the credit exposure arising 
from a derivative transaction under the ``Conversion Factor Matrix 
Method.'' Under this method, the credit exposure will equal and remain 
fixed at the PFE of the derivative transaction, as determined at 
execution of the transaction by reference to a simple look-up table 
(Table 1). This table is similar to Table B included in the Risk-Based 
Capital Guidelines Appendix of 12 CFR part 3, but has been adjusted so 
that the table adequately reflects the absence of the current MTM 
component of the credit exposure of these transactions. This approach 
will be considerably less burdensome than the Internal Model Method 
because institutions would not have to establish statistical 
simulations of future PFE calculations.
    Under the third method, the Remaining Maturity Method, as set forth 
in Sec.  32.9(b)(1)(iii), the measurement of the credit exposure 
incorporates both the current MTM and the transaction's remaining 
maturity (measured in years) as well as a fixed add-on for each year of 
the transaction's remaining life. Specifically, this method measures 
credit exposure by adding the current MTM value of the transaction to 
the product of the notional amount of the transaction, the remaining 
maturity of the transaction, and a fixed multiplicative factor. These 
multiplicative factors differ based on product type and are determined 
by a look-up table (Table 2).
    The credit exposure calculated under the Remaining Maturity Method 
accounts for the diminishing maturity of the transaction as well as the 
current MTM of the transaction. Institutions may find that any 
additional burden involved with determining the MTM under this optional 
method is balanced by the fact that, depending on the MTM, as the 
maturity decreases, the credit exposure also decreases, thereby 
permitting additional extensions of credit under the lending limit.
    In addition, the Remaining Maturity Method incorporates the fact 
that a negative MTM for a bank offsets the positive contribution to 
exposure from the remaining life portion of the calculation, though the 
overall calculation has a floor of zero.
    Question 6: Does the calculation under the Remaining Maturity 
Method adequately measure the credit exposures attributable to 
derivative transactions? For the Conversion Factor Matrix Method, has 
the OCC adjusted the numbers in the look-up table (Table 1) in a manner 
that adequately captures, overstates, or understates the credit 
exposures of these transactions? Similarly, for the Remaining Maturity 
Method, has the OCC calibrated the values included in Table 2 correctly 
so that they appropriately measure the credit risk?
    In the case of credit derivatives, in which a national bank or 
savings association buys or sells credit protection against loss on a 
third-party reference entity, a special rule applies that is set forth 
in Sec.  32.9(b)(2) of the interim final rule. Specifically, a national 
bank or savings association that uses the Conversion Factor Matrix 
Method or Remaining Maturity Method, or that uses the Internal Model 
Method without entering an effective margining arrangement with its 
counterparty as defined in Sec.  32.2(l) of the interim final rule, 
calculates the counterparty credit exposure arising from credit 
derivatives by adding the net notional value of all protection 
purchased from the

[[Page 37269]]

counterparty on each reference entity. For example, Bank A buys and 
sells credit protection from and to Bank B on Firms X, Y and Z. No 
effective margining arrangement exists between the banks. Bank A's net 
notional protection purchased from Bank B is $50 for Firm X and $100 
for Firm Y. Bank A's net protection sold to Bank B is $35 for Firm Z. 
The lending limit exposure of Bank A to Bank B is $150.
    In addition, a national bank or savings association calculates the 
credit exposure to a reference entity \7\ arising from credit 
derivatives by adding the notional value of all protection sold on the 
reference entity. For example, Bank C buys and sells credit protection 
on Firms 1, 2 and 3. Bank C's notional protection sold is $100 for Firm 
1, $200 for Firm 2 and $300 for Firm 3. The lending limit exposure of 
Bank C to Firm 1 is $100, to Firm 2 is $200 and to Firm 3 is $300.
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    \7\ Section 610 of the Dodd-Frank Act applies the lending limit 
to counterparty credit exposures arising from derivative 
transactions (``credit exposure to a person arising from a * * * 
transaction between the national banking association and the 
person'') (emphasis added). Section 610 (a)(1), as codified at 12 
U.S.C. 84(b)(1)(C). The OCC's authority to apply the lending limit 
to exposures to reference entities in credit derivatives derives 
from 12 U.S.C. 84(b)(1)(B) (loans subject to the lending limit 
include ``to the extent specified by the Comptroller of the 
Currency, any liability * * * to advance funds to or on behalf of a 
person pursuant to a contractual commitment'').
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    However, the bank or savings association may reduce its exposure to 
a reference entity by the amount of any eligible credit derivative, as 
defined in Sec.  32.2(m), purchased on that reference entity from an 
eligible protection provider, as defined in Sec.  32.2(o). In the last 
example, if Bank C purchases protection on Firm 3 from an eligible 
protection provider in the amount of $25 via an eligible credit 
derivative, Bank C can reduce its $300 lending limit exposure to Firm 3 
to $275.
    Question 7: Has the OCC appropriately provided for exposure to both 
counterparties and reference entities?
    Question 8: Should protection purchased from eligible protection 
providers by way of eligible credit derivatives be allowed to reduce 
other exposures under the lending limit, for example, loans 
traditionally covered by the lending limit and counterparty credit 
exposure arising from financial derivatives, at least where the 
protection contract maturity is as long as the maturity of the other 
exposure?
    Although both the Internal Model Method, the Remaining Maturity 
Method, and the Conversion Factor Matrix Method will generally be 
available to all institutions, the interim final rule provides that the 
OCC, in the case of national banks and Federal savings associations, 
and the FDIC, in the case of state savings associations, may require 
use of a specific method to calculate credit exposure if it finds that 
such method is necessary to promote the safety and soundness of the 
bank or savings association.
    The OCC is aware that, under the Conversion Factor Matrix Method, 
the actual MTM value at a given point in the life of a derivative 
contract may exceed the initially estimated PFE, and that it would be 
possible for a bank to make a new loan that, combined with the actual 
exposure (were such exposure based on current MTM value), could exceed 
the lending limit. The OCC believes that the risks in such case are 
limited and can be addressed in the supervisory process by examiners 
appropriately responding to unsafe and unsound concentrations, and that 
the certainty and simplicity of allowing non-complex banks and savings 
associations to ``lock in'' the attributable exposure at the execution 
of the contract balance the possible risks.
    Question 9: Has the OCC properly reflected the different derivative 
transactions undertaken by community, mid-size, and large institutions 
for purposes of application of the lending limits? Does the rule 
adequately capture the actual risks of these transactions?
2. Securities Financing Transactions
    The interim final rule provides national banks and savings 
associations with two options for determining the credit exposure of 
securities financing transactions, defined as repurchase agreements, 
reverse repurchase agreements, securities lending transactions, and 
securities borrowing transactions. These methods recognize that the 
size of the institution and complexity and volume of the securities 
financing transactions engaged in by the institution may warrant 
different approaches. As with derivative transactions, unless required 
to use a specific method pursuant to Sec.  32.9(c)(2), a national bank 
or savings association may choose which of the two methods it will use 
and must use this same method for calculating credit exposure arising 
from all securities financing transactions.
    Question 10: Is the requirement to use the same method to calculate 
credit exposure for all securities financing transactions appropriate? 
Should institutions be allowed to use a different method for different 
types of securities financing transactions, or for the same transaction 
type but different parties?
    The first option, the Internal Model Method, provides that an 
institution may calculate the credit exposure of a securities financing 
transaction by using an internal model approved by the appropriate 
Federal banking agency for purposes of Sec.  32(d) of the Internal-
Ratings-Based Appendices of the OCC or FDIC's capital rules,\8\ as 
appropriate, or any other appropriate model approved by the appropriate 
Federal banking agency.
---------------------------------------------------------------------------

    \8\ 12 CFR part 3, Appendix C for national banks; 12 CFR part 
167, Appendix C for Federal savings associations; and 12 CFR 390, 
subpart Z, Appendix A for state savings associations.
---------------------------------------------------------------------------

    The calculation of the credit exposure under the second option, the 
Non-Model Method, is based on the type of securities financing 
transaction at issue. As with derivative transactions, the OCC finds 
that for non-complex institutions engaged in these transactions, the 
simpler approach to measuring credit exposure in the Non-Model Method 
adequately protects the safety and soundness of the institution while 
mitigating regulatory burden. The specific method for calculating 
credit exposure under the Non-Model Method for each type of securities 
financing transaction is set forth below.
    Repurchase agreements and securities lending transactions. In a 
repurchase agreement, also known as a liability repo, an institution 
that owns securities borrows funds by selling the specified securities 
to another party under a simultaneous agreement to repurchase the same 
securities at a specified price and date. In a securities lending 
transaction, an institution lends securities to a counterparty (who may 
use them to cover a short sale or satisfy some other obligation). A 
securities loan is collateralized, usually by cash but sometimes by 
other securities. The economics of a securities lending transaction are 
identical to a repurchase agreement when the collateral received by the 
institution is cash. If the collateral is securities, the economics are 
slightly different because there is the risk of market price changes on 
both the securities loaned and the securities received as collateral. 
For example, the value of the security loaned could increase, and the 
value of the collateral received could decrease.
    The interim final rule provides under the Non-Model Method, in 
Sec. Sec.  32.9(c)(1)(ii)(A) and (ii)(B)(1), that for a repurchase 
agreement or a securities loan where the collateral is cash, exposure 
under the lending limit will be equal to and remain fixed at the net 
current exposure, i.e., the market value at execution of the 
transaction of

[[Page 37270]]

securities transferred to the other party, less cash received from the 
other party. For securities lending transactions where the collateral 
is other securities (i.e., not cash), Sec.  32.9(c)(1)(ii)(B)(2) of the 
interim final rule provides that the exposure will be equal to and 
remain fixed at the product of the higher of the two haircuts 
associated with the securities, as determined by a look-up table 
included in the regulation (Table 3), and the higher of the two par 
values of the securities. The haircuts in Table 3 are consistent with 
the standard supervisory market price volatility haircuts in 12 CFR 
part 3, Appendix C.
    Reverse repurchase agreements (asset repos) and securities 
borrowing transactions. In a reverse repurchase agreement, also known 
as an asset repo, an institution lends money to a counterparty by 
purchasing a security and agreeing to resell the security to the 
counterparty at a future date. For example, an institution may enter 
into an asset repo to invest excess liquidity or to obtain securities 
to use as collateral in other transactions, or an institution may need 
securities to cover short positions or to pledge against public funds 
to obtain a low-cost source of funding.
    In a typical securities borrowing transaction, an institution 
needing to borrow securities obtains the securities from a securities 
lender and posts collateral in the form of cash and/or marketable 
securities with the securities lender (or an agent acting on behalf of 
the securities lender) in an amount that fully covers the value of the 
securities borrowed plus an additional margin, usually ranging from two 
to five percent. The economics of a securities borrowing transaction 
are identical to a reverse repurchase agreement (asset repo) when the 
collateral posted by the institution is cash.
    Under the Non-Model Method, Sec. Sec.  32.9(c)(1)(ii)(C) and 
(c)(1)(ii)(D)(1) of the interim final rule provide that the credit 
exposure arising from a reverse repurchase agreement or a securities 
borrowing transaction where the collateral is cash will equal and 
remain fixed at the product of the haircut associated with the 
collateral received, as determined in Table 3, and the amount of cash 
transferred to the other party. Section 32.9(c)(1)(ii)(D)(2) provides 
that the credit exposure arising from a securities borrowed transaction 
where the collateral is other securities (i.e., not cash) shall equal 
and remain fixed at the product of the higher of the two haircuts 
associated with the securities, as determined in Table 3, and the 
higher of the two par values of the securities.
    Question 11: Are the look-up tables provided in the rule 
appropriate? Would another look-up table included in 12 CFR part 3 be 
more appropriate? Do the numbers included in Table 1 adequately capture 
the credit exposure of the transactions in question?
    Provision applicable to all securities financing transactions--Type 
I securities. New Sec.  32.3(c)(11) of the interim final rule excepts 
from the lending limit credit exposures arising from securities 
financing transactions in which the securities being financed are 
certain government securities, specifically, Type I securities, as 
defined in 12 CFR 1.2(j), in the case of national banks; or securities 
listed in section 5(c)(1)(C), (D), (E), and (F) of HOLA and general 
obligations of a state or subdivision as listed in section 5(c)(1)(H) 
of HOLA, 12 U.S.C. 1464(c)(1)(C), (D), (E), (F), and (H), in the case 
of savings associations.\9\ This exception is appropriate because these 
transactions typically involve less risk and involve securities in 
which national banks and savings associations may invest under 12 
U.S.C. 24 (Seventh) and section 5(c)(1) of the HOLA, as appropriate, 
without limit. This treatment follows the treatment of reverse 
repurchase agreements in current part 32, under which such transactions 
are treated as loans subject to an exception for transactions relating 
to Type I securities as defined in 12 CFR part 1. This exception may 
reduce regulatory burden for community and midsize institutions because 
it is relatively uncommon for these institutions to engage in a 
securities financing transaction involving non-type I securities and 
non-5(c)(1) securities.\10\
---------------------------------------------------------------------------

    \9\ For national banks, a Type I security means: (1) Obligations 
of the United States; (2) obligations issued, insured, guaranteed by 
a department or an agency of the United States Government, if the 
obligation, insurance, or guarantee commits the full faith and 
credit of the United States for the repayment of the obligation; (3) 
obligations issued by a department or agency of the United States, 
or an agency or political subdivision of a state of the United 
States, that represent an interest in a loan or a pool of loans made 
to third parties, if the full faith and credit of the United States 
has been validly pledged for the full and timely payment of interest 
on, and principal of, the loans in the event of non-payment by the 
third party obligor(s); (4) general obligations of a state of the 
United States or any political subdivision thereof; and municipal 
bonds if the national bank is well capitalized; (5) obligations 
authorized under 12 U.S.C. 24 (Seventh) as permissible for a 
national bank to deal in, underwrite, purchase, and sell for the 
bank's own account, including qualified Canadian government 
obligations; and (6) other securities the OCC determines to be 
eligible as Type I securities under 12 U.S.C. 24 (Seventh). See 
section 24 (Seventh) of the Revised Statutes, 12 U.S.C. 24 (Seventh) 
and 12 CFR 1.2(j). For Federal savings associations, these 
investments include obligations of, or fully guaranteed as to 
principal and interest by, the United States; investments in 
securities of the Federal Home Loan Banks, the Federal Home Loan 
Mortgage Corporation, the Federal National Mortgage Association, the 
Government National Mortgage Association, or any agency of the 
United States; and investments in obligations issued by any state or 
political subdivision thereof. See section 5(c)(1) of the HOLA, 12 
U.S.C. 1464(c)(1).
    \10\ See current Sec.  32.2(k)(1)(iii). As noted above, the 
interim final rule deletes Sec.  32.2(k)(1)(iii) (renumbered by the 
interim final rule as (Sec.  32.2(q)(1)(vii)) as we have added new 
Sec.  32.3(c)(11).
---------------------------------------------------------------------------

    (3) Mandatory use of model. Finally, as with derivative 
transactions, Sec.  32.9(c)(2) provides that the OCC or FDIC, as 
appropriate, may require a national bank or savings association to use 
a specific method to calculate the credit exposure of securities 
financing transactions if the OCC or FDIC finds that this method is 
necessary to promote the safety and soundness of the bank or savings 
association.
    Question 12: Has the OCC properly accounted for the different 
securities financing transactions in institutions of different size and 
complexity? Does the rule adequately capture the actual risks of these 
transactions?
    Question 13: Please comment on the provision that provides the OCC 
and FDIC with authority to require modeling. Is this discretion 
appropriately described?
3. Provisions Applicable to Both Derivative Transactions and Securities 
Financing Transactions
    Unless described above, all provisions of part 32 will apply to 
credit exposures arising from a derivative transaction or a securities 
financing transaction, including the lending limit calculation rules of 
Sec.  32.4 and the combination rules of Sec.  32.5. In addition, the 
interim final rule adds the following provisions to part 32 that apply 
only to derivative transactions or securities financing transactions.
    Exception. The interim final rule amends Sec.  32.3(c) to add 
intraday credit exposures arising from a derivative transaction or 
securities financing transaction as an additional exception to the 
lending limits for national banks and savings associations. This 
exception will help minimize the impact of the interim final rule on 
the payment and settlement of financial transactions and is consistent 
with the current application of national bank lending limits to certain 
transactions.\11\
---------------------------------------------------------------------------

    \11\ We note that the lending limit rules have long provided 
that an intraday overdraft and a sale of Federal funds with a 
maturity of one day or less are not subject to the lending limit. 
See 12 CFR 32.2(k)(l)(v), (vi) of the current rule.
---------------------------------------------------------------------------

    Question 14: Is the intraday exception appropriate? Should the OCC 
exempt other types of intraday exposures?

[[Page 37271]]

Should the OCC provide for other exemptions for credit exposures 
arising from derivative transactions or securities financing 
transactions? Why?
    Nonconforming Loans and Extensions of Credit. The interim final 
rule adds a new paragraph (a)(3) to Sec.  32.6 to provide that a credit 
exposure arising from a derivative transaction or securities financing 
transaction and determined by the Internal Model Method specified in 
Sec.  32.9(b)(1)(i) or Sec.  32.9 (d)(3), respectively, will not be 
deemed a violation of the lending limits statute or regulation and will 
be treated as nonconforming if the extension of credit was within the 
national bank's or savings association's legal lending limit at 
execution and is no longer in conformity because the exposure has 
increased since execution.
    Question 15: The interim final rule does not address the 
applicability of the lending limit rules to a national bank's or 
savings association's contingent obligation under derivative 
clearinghouse rules to advance funds to a clearinghouse guaranty fund. 
Please comment on whether and to what extent part 32 should to apply to 
these obligations and if applicable, how the credit exposure of these 
obligations should be measured.
    Question16: Should the lending limit calculation rules set forth at 
Sec.  32.4 or the combination rules set forth at Sec.  32.5 be adjusted 
or changed in any way given the addition of credit exposures arising 
from derivative and securities financing transactions to part 32 as new 
categories of extensions of credit?
4. Explanatory Table
    The table below is provided to aid in understanding the interim 
final rule. It is not a substitute for the interim final rule itself.

--------------------------------------------------------------------------------------------------------------------------------------------------------
          Transaction type                What happens?            Credit risk        Transaction purpose      Credit exposure            Example
--------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Swap.................  Banks execute interest  If the bank receives a  Banks do interest      Banks that have an     Non-modeled bank:
                                      rate and other swaps    fixed rate, it has a    rate swaps to          approved model can    Bank A without an
                                      by signing a            mark-to-market (MTM)    convert cash flows     choose to use the      approved model
                                      transaction             gain if interest        from fixed to          model to determine     executes a $10
                                      confirmation, which     rates fall. That        floating, or vice      the attributable       million, 5-year,
                                      becomes part of an      represents a current    versa.                 credit exposure.       interest rate swap.
                                      ISDA Master Agreement.  credit exposure (CCE).                        Institutions can lock-  It receives a fixed
                                                             If the bank pays a                              in, or fix,            rate and pays
                                                              fixed rate, it has a                           attributable credit    floating. The PFE
                                                              MTM gain if rates                              exposure at the        factor for this swap
                                                              rise. A MTM gain is                            potential future       is 1.5%. Bank A
                                                              CCE.                                           exposure (PFE) on      ``locks-in''
                                                             Beyond current                                  day 1 by simply        attributable
                                                              exposure, the bank                             multiplying notional   exposure of $150,000
                                                              has a risk of                                  principal amount by    ($10 million x
                                                              potential future                               a conversion factor    1.5%), the day-one
                                                              exposure (PFE), i.e.,                          provided in table.     PFE amount Under
                                                              the amount the CCE                             No requirement to      remaining maturity
                                                              might become over                              calculate daily mark-  method: Bank A
                                                              time.                                          to-market or re-       enters a 5-year
                                                                                                             calculate PFE.         interest rate swap
                                                                                                                                    with notional value
                                                                                                                                    of $100,000 and MTM
                                                                                                                                    of zero at
                                                                                                                                    execution. At
                                                                                                                                    execution, Bank A's
                                                                                                                                    exposure is $7,500
                                                                                                                                    ($0 + ($100,000 x 5
                                                                                                                                    x 1.5%)). In year 2,
                                                                                                                                    Bank A makes loan to
                                                                                                                                    counterparty of
                                                                                                                                    interest rate swap.
                                                                                                                                    At this time, MTM of
                                                                                                                                    swap is $1,000. Bank
                                                                                                                                    A's lending limit
                                                                                                                                    exposure is $5,500
                                                                                                                                    ($1,000 + ($100,000
                                                                                                                                    x 3 x 1.5%)). If the
                                                                                                                                    MTM of the swap in
                                                                                                                                    year 2 is negative
                                                                                                                                    $1,000, Bank A's
                                                                                                                                    lending limit
                                                                                                                                    exposure for the
                                                                                                                                    swap is $3,500 (-
                                                                                                                                    $1,000 + ($100,000 x
                                                                                                                                    3 x 1.5%)). If the
                                                                                                                                    MTM of the swap in
                                                                                                                                    year 2 is negative
                                                                                                                                    $10,000. Bank A's
                                                                                                                                    lending limit
                                                                                                                                    exposure for the
                                                                                                                                    swap is zero (-
                                                                                                                                    $10,000 + ($100,000
                                                                                                                                    x 3 x 1.5%) =
                                                                                                                                    negative $5,500
                                                                                                                                    which is less than
                                                                                                                                    zero; zero is the
                                                                                                                                    floor for the
                                                                                                                                    calculated
                                                                                                                                    exposure).

[[Page 37272]]

 
Credit Derivative..................  Banks buy or sell       The protection seller   Transactions such as   To Counterparty:       Modeled bank with
                                      protection on a         is exposed to default   credit default swaps   Banks that model       effective margining
                                      reference entity        and/or credit           allow institutions     derivatives            arrangement: Bank A
                                      (RE). Protection        deterioration of the    to sell credit         exposures (see         buys and sells
                                      buyers are hedging      RE. It will make a      protection (i.e.,      above) determine the   credit protection
                                      risk; protection        payment upon default    assume credit risk)    attributable           from and to Bank B
                                      sellers are taking on   of the RE.              against loss on a      exposure based on      on Firms X, Y and Z.
                                      risk (e.g., using the  The protection buyer     third-party            the model provided     There is an
                                      CDS exposure as a       is exposed to the       reference entity.      there is an            effective margining
                                      loan substitute).       counterparty risk of    Protection sellers     effective margining    arrangement between
                                                              the dealer; the buyer   often use CDS as       arrangement. Banks     the banks. Banks A
                                                              expects payment from    loan substitutes.      that use the           and B use their
                                                              the dealer if there    Protection buyers       conversion factor      models to determine
                                                              is a default.           typically use credit   approach (see above)   their counterparty
                                                                                      derivatives to hedge   or that model but do   credit exposures
                                                                                      credit exposures in    not have an           Non-modeled bank or
                                                                                      their loan             effective margining    bank without
                                                                                      portfolios.            arrangement            effective margining
                                                                                                             calculate the          arrangement: Bank A
                                                                                                             attributable           buys and sells
                                                                                                             exposure as the sum    credit protection
                                                                                                             of all net notional    from and to Bank B
                                                                                                             protection purchased   on Firms X, Y and Z.
                                                                                                             amounts across         Bank A's net
                                                                                                             reference entities     notional protection
                                                                                                             To Reference           purchased from Bank
                                                                                                             Entities: Banks        B is $50 for Firm X
                                                                                                             calculate the          and $100 for Firm Y.
                                                                                                             exposure as the net    Bank A's net
                                                                                                             notional protection    protection sold to
                                                                                                             sold amount. The       Bank B is $35 for
                                                                                                             bank may reduce this   Firm Z. The lending
                                                                                                             amount by the amount   limit exposure of
                                                                                                             of any eligible        Bank A to Bank B is
                                                                                                             credit derivative      $150.
                                                                                                             purchased on that     Bank C buys and sells
                                                                                                             reference entity       credit protection on
                                                                                                             from an eligible       Firms 1, 2, and 3.
                                                                                                             protection provider.   Bank C's notional
                                                                                                                                    protection sold is
                                                                                                                                    $100 for Firm 1,
                                                                                                                                    $200 for Firm 2 and
                                                                                                                                    $300 for Firm 3. The
                                                                                                                                    lending limit
                                                                                                                                    exposure of Bank C
                                                                                                                                    to Firm 1 is $100,
                                                                                                                                    to Firm 2 is $200
                                                                                                                                    and to Firm 3 is
                                                                                                                                    $300. If Bank C
                                                                                                                                    purchases protection
                                                                                                                                    on Firm 3 from an
                                                                                                                                    eligible protection
                                                                                                                                    provider in the
                                                                                                                                    amount of $25 via an
                                                                                                                                    eligible credit
                                                                                                                                    derivative, Bank C
                                                                                                                                    can reduce its $300
                                                                                                                                    lending limit
                                                                                                                                    exposure to Firm 3
                                                                                                                                    to $275.
Reverse Repo (bank asset)..........  Lend cash against       Collateral value falls  Provide secured        Attributable credit    Non-modeled bank:
                                      collateral.                                     financing; invest      exposure for lending   Lend $100 secured by
                                                                                      funds; run a dealer    limit purposes is      securities worth
                                                                                      matched book.          the product of the     $102 that have
                                                                                                             haircut associated     haircut of 5%. LLL
                                                                                                             with the collateral    exposure is $5 ($100
                                                                                                             received and the       x 5%).
                                                                                                             amount of cash
                                                                                                             transferred.
Repo (bank liability)..............  Borrow cash against     Collateral value rises  Finance inventory;     Attributable credit    Non-modeled bank:
                                      collateral.                                     run a dealer matched   exposure for lending   Bank executes a repo
                                                                                      book.                  limit purposes is      in which it borrows
                                                                                                             the difference         $100, pledging
                                                                                                             between the market     securities worth
                                                                                                             value of securities    $102. Attributable
                                                                                                             transferred less       exposure is $2, the
                                                                                                             cash received (i.e.,   amount of net
                                                                                                             the net current        current credit
                                                                                                             credit exposure).      exposure.

[[Page 37273]]

 
Securities Borrowed (bank asset)...  Lend cash against       Collateral value falls  Obtain collateral to   If cash is             Non-modeled bank,
                                      collateral.                                     cover a short          collateral, treat      cash as collateral:
                                                                                      position.              the same as reverse   Bank borrows a $100
                                                                                                             repo: Attributable     par value security
                                                                                                             credit exposure for    that has a fair
                                                                                                             lending purposes is    value of $102. The
                                                                                                             the product of the     bank pledges $100 in
                                                                                                             haircut associated     cash. The haircut
                                                                                                             with the collateral    associated with the
                                                                                                             received and the       security is 5%. The
                                                                                                             amount of cash         attributable
                                                                                                             transferred.           exposure is $5 ($100
                                                                                                            If collateral is        x 5%).
                                                                                                             securities:           Non-modeled bank,
                                                                                                             Attributable credit    securities as
                                                                                                             exposure for lending   collateral.
                                                                                                             limit purposes is     Bank borrows a $100
                                                                                                             the product of the     par value security
                                                                                                             higher of the two      (with fair value
                                                                                                             haircuts associated    $101) and pledges a
                                                                                                             with the two           security with a par
                                                                                                             securities and the     value of $100. The
                                                                                                             higher of the two      fair value of the
                                                                                                             par values of the      security pledged is
                                                                                                             securities.            $102. The haircut on
                                                                                                                                    the borrowed
                                                                                                                                    security is 2% and
                                                                                                                                    the haircut on the
                                                                                                                                    pledged security is
                                                                                                                                    5%. The attributable
                                                                                                                                    exposure is $5 ($100
                                                                                                                                    x 5%), based upon
                                                                                                                                    the higher of the
                                                                                                                                    two security
                                                                                                                                    haircuts and the
                                                                                                                                    higher of the two
                                                                                                                                    par values (here the
                                                                                                                                    par values were the
                                                                                                                                    same).
Securities Loaned (bank liability).  Borrow cash against     Collateral value rises  Generate income......  If collateral          Non-modeled bank,
                                      collateral.                                                            received is cash,      cash as collateral:
                                                                                                             treat the same as a    Bank lends a $102
                                                                                                             repo: The              security (par value
                                                                                                             attributable credit    of $100) and
                                                                                                             exposure for lending   receives $100 in
                                                                                                             limit purposes is      cash collateral.
                                                                                                             the net current        Attributable
                                                                                                             credit exposure.       exposure is $2, the
                                                                                                            If the collateral       net current credit
                                                                                                             received is other      exposure
                                                                                                             securities: The       Non-modeled bank,
                                                                                                             attributable credit    securities as
                                                                                                             exposure for lending   collateral: Bank
                                                                                                             limit purposes is      lends a $100 par
                                                                                                             the product of the     value security (fair
                                                                                                             higher of the two      value $101) and
                                                                                                             haircuts associated    receives another
                                                                                                             with the two           security as
                                                                                                             securities and the     collateral. The
                                                                                                             higher of the two      collateral has a
                                                                                                             par values of the      $100 par value (and
                                                                                                             securities.            $102 fair value).
                                                                                                                                    The haircut on the
                                                                                                                                    loaned and borrowed
                                                                                                                                    securities are 2%
                                                                                                                                    and 5% respectively.
                                                                                                                                    Attributable
                                                                                                                                    exposure is $5,
                                                                                                                                    based upon the
                                                                                                                                    higher of the two
                                                                                                                                    security haircuts
                                                                                                                                    and the higher of
                                                                                                                                    the two par values
                                                                                                                                    (here the par values
                                                                                                                                    were the same).
--------------------------------------------------------------------------------------------------------------------------------------------------------

III. Effective and Compliance Dates

    This interim final rule is effective on July 21, 2012. Pursuant to 
the Administrative Procedure Act (APA), at 5 U.S.C. 553(b)(B), notice 
and comment are not required prior to the issuance of a final rule if 
an agency, for good cause, finds that ``notice and public procedure 
thereon are impracticable, unnecessary, or contrary to the public 
interest.''
    The amendments made by section 610 of the Dodd-Frank Act are 
effective on July 21, 2012.\12\ These amendments are not self-
executing, however, in that they do not provide national banks and 
savings associations with the methodology necessary to comply with the 
new requirements they impose.
---------------------------------------------------------------------------

    \12\ Dodd-Frank Act, section 610(c).
---------------------------------------------------------------------------

    The OCC's approach to implementation of these standards is related 
to, and our rulemaking in this respect has been informed by, proposals 
made by other agencies to implement provisions of the Dodd-Frank Act 
raising similar issues and the comments received by other agencies in 
connection with such rulemakings.\13\ Consideration of this information 
was appropriate in connection with the OCC's implementation of the 
amendments made by section 610 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \13\ E.g., the Federal Reserve Board's rulemaking implementing 
section 165(e) of the Dodd Frank Act (single counterparty credit 
exposures of large bank holding companies and certain nonbank 
financial companies (covered companies)), 77 FR 594 (Jan. 5, 2012).

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

[[Page 37274]]

    Based on consideration of the information thereby available, this 
interim final rule provides clarity regarding the OCC's application of 
the requirements of section 610. The OCC finds that, under these 
circumstances, prior notice and comment are impracticable and that the 
public interest is best served by making the rule effective on the same 
day as the amendments made by section 610 of the Dodd-Frank Act are 
effective. Otherwise, national banks and savings associations would be 
subject to unpredictable assertions of interpretations of the scope and 
application of the new requirements of section 610 that could result in 
applications of section 610 contrary to the OCC's interpretation of 
that section.
    For these same reasons, with respect to the amendments implementing 
section 610 of the Dodd-Frank Act, the OCC finds good cause to dispense 
with the delayed effective date otherwise required by section 302 of 
the Riegle Community Development and Regulatory Improvement Act of 1994 
(RCDRIA), 12 U.S.C. 4802.\14\
---------------------------------------------------------------------------

    \14\ The RCDRIA requires that, subject to certain exceptions, 
regulations imposing additional reporting, disclosure, or other 
requirements on insured depository institutions take effect on the 
first day of the calendar quarter after publication of the final 
rule. This effective date requirement does not apply if the agency 
finds for good cause that the regulation should become effective 
before such time.
---------------------------------------------------------------------------

    The OCC recognizes, however, that national banks and savings 
associations will need time to conform their operations to the 
amendments implementing section 610 as applied by the OCC. The interim 
final rule, therefore, includes at Sec.  32.1(d) a temporary exception 
from the lending limit rules for extensions of credit arising from 
derivative transactions or securities financing transactions, until 
January 1, 2013. This exception is issued pursuant to section 
5200(d)(1) of the Revised Statutes, 12 U.S.C. 84(d)(1), which 
authorizes the OCC to prescribe rules to administer and carry out the 
purposes of the lending limit statute, including rules to establish 
limits or requirements other than those specified in the statute for 
particular classes or categories of loans or extensions of credit. As a 
result of this exception, institutions will not be required to comply 
with amendments in the interim final rule implementing section 610 of 
the Dodd Frank Act until January 1, 2013. As a practical matter, the 
temporary exception afforded by the interim final rule fulfills the 
same objectives as a delayed effective date, that is, providing 
affected institutions with time to adjust their systems and procedures 
to come into compliance with new requirements. Notwithstanding this 
exception to the particular new lending limits provisions, the OCC 
retains full authority to address credit exposures that present undue 
concentrations on a case-by-case basis through our existing safety and 
soundness authorities.
    In addition to the amendments required to implement section 610, 
this rulemaking also contains amendments that are necessary to 
consolidate the lending limit rules applicable to national banks and 
savings associations. As indicated previously, the integration 
amendments included in this interim final rule do not impose any new 
reporting, disclosure, or other requirements on national banks or 
savings associations. To the extent that the interim final rule differs 
from the current lending limit rules, these differences reduce 
compliance requirements. Accordingly, good cause exists to make these 
amendments effective without prior notice and comment. For the same 
reasons, the RCDRIA does not apply to the integration-related 
amendments made by this interim final rule.
    We note that after the 45-day comment period, the OCC may amend 
this interim final rule based on comments received. If any such 
amendments are required, we will issue a final rule as expeditiously as 
possible, and will adjust the compliance date if, and as, necessary.

IV. Solicitation of 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 interim final rule. In particular, we 
request suggestions on ways to streamline this rule and reduce 
regulatory burden while still accomplishing the objectives that the 
rule seeks to achieve.

V. Regulatory Analysis

Regulatory Flexibility Act Analysis

    Pursuant to the Regulatory Flexibility Act (RFA),\15\ 5 U.S.C. 603, 
an agency must prepare a regulatory flexibility analysis for all 
proposed and final rules that describe the impact of the rule on small 
entities, unless the head of an agency certifies that the rule will not 
have ``a significant economic impact on a substantial number of small 
entities.'' However, the RFA applies only to rules for which an agency 
publishes a general notice of proposed rulemaking pursuant to 5 U.S.C. 
553(b).\16\ Pursuant to the APA at 5 U.S.C. 553(b)(B), general notice 
and an opportunity for public comment are not required prior to the 
issuance of a final rule when an agency, for good cause, finds that 
``notice and public procedure thereon are impracticable, unnecessary, 
or contrary to the public interest.'' As discussed above, the OCC has 
determined for good cause that the APA does not require general notice 
and public comment on this interim final rule and, therefore, we are 
not publishing a general notice of proposed rulemaking. Thus, the RFA 
does not apply to this interim final rule.
---------------------------------------------------------------------------

    \15\ Public Law 96-354, Sept. 19, 1980.
    \16\ 5 U.S.C. 603(a), 604(a).
---------------------------------------------------------------------------

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency 
prepare a budgetary impact statement before promulgating any rule 
likely to result in 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. If a 
budgetary impact statement is required, Sec.  205 of the Unfunded 
Mandates Act also requires an agency to identify and consider a 
reasonable number of regulatory alternatives before promulgating a 
rule. The OCC has determined that there is no Federal mandate imposed 
by this rulemaking 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. Accordingly, final rule is not 
subject to Sec.  202 of the Unfunded Mandates Act.

Paperwork Reduction Act

    In accordance with the requirements 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. This rule contains information 
collection requirements under the PRA, which have been previously 
approved by OMB under OMB Control No. 1557-0221. The requirements under 
this collection remain unchanged except for the addition of savings 
associations as respondents. This information collection will be 
amended through a non-substantive change to include the burden for 
savings associations.

[[Page 37275]]

List of Subjects

12 CFR Part 32

    National banks, Reporting and recordkeeping requirements.

12 CFR Part 159

    Reporting and recordkeeping requirements, Savings associations.

12 CFR Part 160

    Consumer protection, Investments Mortgages, Reporting and 
recordkeeping requirements, Savings associations, Securities.

    For the reasons set forth in the preamble, chapter I of title 12 of 
the Code of Federal Regulations is amended as follows:

PART 32--LENDING LIMITS

0
1. The authority citation for part 32 is revised to read as follows:

    Authority: 12 U.S.C. 1 et seq., 84, 93a, 1462a, 1463, 1464(u), 
and 5412(b)(2)(B).


0
2. Section 32.1 is amended by:
0
a. Revising paragraphs (a) and (c)(1) through (c)(3);
0
b. In paragraph (b), adding the phrase ``and savings associations'' 
after the word ``banks'';
0
c. In paragraph (c)(4), adding the phrase ``, savings associations,'' 
after the word ``banks''; and
0
d. Adding new paragraph (d).
    The revisions and addition read as follows:


Sec.  32.1  Authority, purpose and scope.

    (a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq., 
12 U.S.C. 84, 93a, 1462a, 1463, 1464(u), and 5412(b)(2)(B).
* * * * *
    (c) Scope. (1) Except as provided by paragraph (d) of this section, 
this part applies to all loans and extensions of credit made by 
national banks, savings associations, and their domestic operating 
subsidiaries. For purposes of this part, the term ``savings 
association'' includes Federal savings associations and state savings 
associations, as those terms are defined in 12 U.S.C. 1813(b). This 
part does not apply to loans or extensions of credit made by a national 
bank, a savings association, and their domestic operating subsidiaries 
to the bank's or savings association's:
    (i) Affiliates, as that term is defined in 12 U.S.C. 371c(b)(1) and 
(e), as implemented by 12 CFR 223.2(a) (Regulation W);
    (ii) The bank's or savings association's operating subsidiaries;
    (iii) Edge Act or Agreement Corporation subsidiaries; or
    (iv) Any other subsidiary consolidated with the bank or savings 
association under Generally Accepted Accounting Principles (GAAP).
    (2) The lending limits in this part are separate and independent 
from the investment limits prescribed by 12 U.S.C. 24 (Seventh) or 12 
U.S.C. 1464(c), as applicable, and 12 CFR parts 1 and 160.30, and a 
national bank or savings association may make loans or extensions of 
credit to one borrower up to the full amount permitted by this part and 
also hold eligible securities of the same obligor up to the full amount 
permitted under 12 U.S.C. 24 (Seventh) or 12 U.S.C. 1464(c), as 
applicable, and 12 CFR part 1 and 12 CFR 160.30.
    (3) Loans and extensions of credit to executive officers, directors 
and principal shareholders of national banks, savings associations, and 
their related interests are subject to limits prescribed by 12 U.S.C. 
375a and 375b in addition to the lending limits established by 12 
U.S.C. 84 or 12 U.S.C. 1464(u) as applicable, and this part.
* * * * *
    (d) Temporary exception. The requirements of this part shall not 
apply to the credit exposure arising from a derivative transaction or 
securities financing transaction until January 1, 2013.

0
3. Section 32.2 is amended by:
0
a. Redesignating paragraphs (a) through (t) as follows:

------------------------------------------------------------------------
          Old paragraph(s)                     New paragraph(s)
------------------------------------------------------------------------
(a) through (g)                      (b) through (h)
(h)                                  (j)
(i)                                  (n)
(j) through (l)                      (p) through (r)
(m)                                  (t)
(n) and (o)                          (v) and (w)
(p) and (q)                          (y) and (z)
(r) through (t)                      (bb) through (dd)
------------------------------------------------------------------------

0
b. Adding new paragraphs (a), (i), (k), (l), (m), (o), (s), (u), (x), 
and (aa) to read as follows;
0
c. Revising newly designated paragraphs (b), (c), (n) introductory 
text, (n)(1), and (q) to read as set forth below;
0
d. In newly designated paragraphs (d) and (f) removing the word 
``bank'' and adding in its place the phrase ``national bank or savings 
association'';
0
e. In newly designated paragraph (g):
0
i. In the introductory text, removing the word ``bank's'' and adding in 
its place the phrase ``national bank's or savings association's'';
0
ii. In paragraphs (g)(1)(i) and (g)(2), adding the phrase ``or savings 
association'' after the word ``bank''; and
0
iii. In paragraphs (g)(1)(iii) and (g)(1)(iv), removing the phrases 
``paragraph (m)'' and ``paragraph (s)'' and adding in its place the 
phrases ``paragraph (t)'' and ``paragraph (cc)'', respectively;
0
f. In newly designated paragraph (n)(2), removing the word ``bank's'' 
and adding in its place the phrase ``national bank's or savings 
association's'';
0
g. In newly designated paragraph (p), removing the word ``banks'' and 
adding in its place the phrase ``national banks or savings 
associations''; and
0
h. In newly designated paragraph (t):
0
i. In the introductory text and paragraph (t)(1), remove the phrase 
``within the bank's'' and adding in its place the phrase ``within the 
national bank's or savings association's'', wherever it appears;
0
ii. In paragraph (t)(1), removing the phrase ``made, the bank'' and 
adding in its place the phrase ``made, the bank or savings 
association'';
0
iii. In paragraphs (t)(1) and (2), adding after the word ``bank's'' the 
phrase ``or savings association's'', wherever it appears;
0
iv. In paragraph (t)(1), removing the phrase ``paragraph (k)(2)(vi)'' 
and adding in its place the phrase ``paragraph (q)(2)(vi); and
0
v. In the first sentence of paragraph (t)(2), removing the word 
``bank'' and adding in its place the phrase ``national bank or savings 
association''.
    The additions and revisions read as follows.


Sec.  32.2  Definitions.

    (a) Appropriate Federal banking agency has the same meaning as in 
12 U.S.C. 1813(q).
    (b) Borrower means a person who is named as a borrower or debtor in 
a loan or extension of credit; a person to whom a national bank or 
savings association has credit exposure arising from a derivative 
transaction or a securities financing transaction, entered by the bank 
or savings association; or any other person, including a drawer, 
endorser, or guarantor, who is deemed to be a borrower under the 
``direct benefit'' or the ``common enterprise'' tests set forth in 
Sec.  32.5.
    (c) Capital and surplus means--
    (1) A national bank's or savings association's Tier 1 and Tier 2 
capital calculated under the risk-based capital standards applicable to 
the institution as reported in the bank's or savings association's 
Consolidated Reports of Condition and Income (Call Report); plus
    (2) The balance of a national bank's or savings association's 
allowance for loan and lease losses not included in the bank's or 
savings association's Tier 2 capital, for purposes of the calculation

[[Page 37276]]

of risk-based capital described in paragraph (c)(1) of this section, as 
reported in the bank's or savings association's Call Report.
* * * * *
    (i) Credit derivative has the same meaning as this term has in 12 
CFR Part 3, Appendix C, Section 2.
* * * * *
    (k) Derivative transaction includes any transaction that is a 
contract, agreement, swap, warrant, note, or option that is based, in 
whole or in part, on the value of, any interest in, or any quantitative 
measure or the occurrence of any event relating to, one or more 
commodities, securities, currencies, interest or other rates, indices, 
or other assets.
    (l) Effective margining arrangement means a master legal agreement 
governing derivative transactions between a bank or savings association 
and a counterparty that requires the counterparty to post, on a daily 
basis, variation margin to fully collateralize that amount of the 
bank's net credit exposure to the counterparty that exceeds $1 million 
created by the derivative transactions covered by the agreement.
    (m) Eligible credit derivative means a single-name credit 
derivative or a standard, non-tranched index credit derivative provided 
that:
    (1) The derivative contract meets the requirements of an eligible 
guarantee, as defined in 12 CFR part 3, Appendix C, and has been 
confirmed by the protection purchaser and the protection provider;
    (2) Any assignment of the derivative contract has been confirmed by 
all relevant parties;
    (3) If the credit derivative is a credit default swap, the 
derivative contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that 
is closely in line with the grace period of the reference exposure; and
    (ii) Bankruptcy, insolvency, or inability of the obligor on the 
reference exposure to pay its debts, or its failure or admission in 
writing of its inability generally to pay its debts as they become due 
and similar events;
    (4) The terms and conditions dictating the manner in which the 
derivative contract is to be settled are incorporated into the 
contract;
    (5) If the derivative contract allows for cash settlement, the 
contract incorporates a robust valuation process to estimate loss with 
respect to the derivative reliably and specifies a reasonable period 
for obtaining post-credit event valuations of the reference exposure;
    (6) If the derivative contract requires the protection purchaser to 
transfer an exposure to the protection provider at settlement, the 
terms of at least one of the exposures that is permitted to be 
transferred under the contract provides that any required consent to 
transfer may not be unreasonably withheld; and
    (7) If the credit derivative is a credit default swap, the 
derivative contract clearly identifies the parties responsible for 
determining whether a credit event has occurred, specifies that this 
determination is not the sole responsibility of the protection 
provider, and gives the protection purchaser the right to notify the 
protection provider of the occurrence of a credit event.
    (n) Eligible national bank or eligible savings association means a 
national bank or saving association that:
    (1) Is well capitalized as defined in the prompt corrective action 
rules applicable to the institution; and
* * * * *
    (o) Eligible protection provider means:
    (1) A sovereign entity (a central government, including the U.S. 
government; an agency; department; ministry; or central bank);
    (2) The Bank for International Settlements, the International 
Monetary Fund, the European Central Bank, the European Commission, or a 
multilateral development bank;
    (3) A Federal Home Loan Bank;
    (4) The Federal Agricultural Mortgage Corporation;
    (5) A depository institution, as defined in section 3 of the 
Federal Deposit Insurance Act, 12 U.S.C. 1813(c);
    (6) A bank holding company, as defined in section 2 of the Bank 
Holding Company Act, as amended, 12 U.S.C. 1841;
    (7) A savings and loan holding company, as defined in section 10 of 
the Home Owners' Loan Act, 12 U.S.C. 1467a;
    (8) A securities broker or dealer registered with the SEC under the 
Securities Exchange Act of 1934, 15 U.S.C. 78o et seq.;s
    (9) An insurance company that is subject to the supervision of a 
State insurance regulator;
    (10) A foreign banking organization;
    (11) A non-U.S.-based securities firm or a non-U.S.-based insurance 
company that is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies; and
    (12) A qualifying central counterparty;
* * * * *
    (q) Loans and extensions of credit means a national bank's or 
savings association's direct or indirect advance of funds to or on 
behalf of a borrower based on an obligation of the borrower to repay 
the funds or repayable from specific property pledged by or on behalf 
of the borrower; and any credit exposure, as determined pursuant to 
Sec.  32.9, arising from a derivative transaction or a securities 
financing transaction.
    (1) Loans or extensions of credit for purposes of 12 U.S.C. 84 or 
12 U.S.C. 1464(u), as applicable, and this part include--
    (i) A contractual commitment to advance funds, as defined in 
paragraph (g) of this section;
    (ii) A maker or endorser's obligation arising from a national 
bank's or savings association's discount of commercial paper;
    (iii) A national bank's or savings association's purchase of third-
party paper subject to an agreement that the seller will repurchase the 
paper upon default or at the end of a stated period. The amount of the 
bank's or savings association's loan is the total unpaid balance of the 
paper owned by the bank or savings association less any applicable 
dealer reserves retained by the bank or savings association and held by 
the bank or savings association as collateral security. Where the 
seller's obligation to repurchase is limited, the bank's or savings 
association's loan is measured by the total amount of the paper the 
seller may ultimately be obligated to repurchase. A national bank's or 
savings association's purchase of third party paper without direct or 
indirect recourse to the seller is not a loan or extension of credit to 
the seller;
    (iv) An overdraft, whether or not prearranged, but not an intra-day 
overdraft for which payment is received before the close of business of 
the national bank or savings association that makes the funds 
available;
    (v) The sale of Federal funds with a maturity of more than one 
business day, but not Federal funds with a maturity of one day or less 
or Federal funds sold under a continuing contract;
    (vi) Loans or extensions of credit that have been charged off on 
the books of the national bank or savings association in whole or in 
part, unless the loan or extension of credit--
    (A) Is unenforceable by reason of discharge in bankruptcy;

[[Page 37277]]

    (B) Is no longer legally enforceable because of expiration of the 
statute of limitations or a judicial decision; or
    (C) Is no longer legally enforceable for other reasons, provided 
that the bank or savings association maintains sufficient records to 
demonstrate that the loan is unenforceable; and
    (vii) A national bank's or savings association's purchase of 
securities subject to an agreement that the seller will repurchase the 
securities at the end of a stated period, but not including a national 
bank's or savings association's purchase of Type I securities, as 
defined in part 1 of this chapter, subject to a repurchase agreement, 
where the purchasing bank or savings association has assured control 
over or has established its rights to the Type I securities as 
collateral.
    (2) The following items do not constitute loans or extensions of 
credit for purposes of 12 U.S.C. 84 or 12 U.S.C. 1464(u), as 
applicable, and this part--
    (i) Additional funds advanced for the benefit of a borrower by a 
national bank or savings association for payment of taxes, insurance, 
utilities, security, and maintenance and operating expenses necessary 
to preserve the value of real property securing the loan, consistent 
with safe and sound banking practices, but only if the advance is for 
the protection of the bank's or savings association's interest in the 
collateral, and provided that such amounts must be treated as an 
extension of credit if a new loan or extension of credit is made to the 
borrower;
    (ii) Accrued and discounted interest on an existing loan or 
extension of credit, including interest that has been capitalized from 
prior notes and interest that has been advanced under terms and 
conditions of a loan agreement;
    (iii) Financed sales of a national bank's or savings association's 
own assets, including Other Real Estate Owned, if the financing does 
not put the bank or savings association in a worse position than when 
the bank or savings association held title to the assets;
    (iv) A renewal or restructuring of a loan as a new ``loan or 
extension of credit,'' following the exercise by a national bank or 
savings association of reasonable efforts, consistent with safe and 
sound banking practices, to bring the loan into conformance with the 
lending limit, unless new funds are advanced by the national bank or 
savings association to the borrower (except as permitted by Sec.  
32.3(b)(5)), or a new borrower replaces the original borrower, or 
unless the appropriate Federal banking agency determines that a renewal 
or restructuring was undertaken as a means to evade the bank's or 
savings association's lending limit;
    (v) Amounts paid against uncollected funds in the normal process of 
collection; and
    (vi)(A) That portion of a loan or extension of credit sold as a 
participation by a national bank or savings association on a 
nonrecourse basis, provided that the participation results in a pro 
rata sharing of credit risk proportionate to the respective interests 
of the originating and participating lenders. Where a participation 
agreement provides that repayment must be applied first to the portions 
sold, a pro rata sharing will be deemed to exist only if the agreement 
also provides that, in the event of a default or comparable event 
defined in the agreement, participants must share in all subsequent 
repayments and collections in proportion to their percentage 
participation at the time of the occurrence of the event.
    (B) When an originating national bank or savings association funds 
the entire loan, it must receive funding from the participants before 
the close of business of its next business day. If the participating 
portions are not received within that period, then the portions funded 
will be treated as a loan by the originating bank or savings 
association to the borrower. If the portions so attributed to the 
borrower exceed the originating bank's or savings association's lending 
limit, the loan may be treated as nonconforming subject to Sec.  32.6, 
rather than a violation, if:
    (1) The originating national bank or savings association had a 
valid and unconditional participation agreement with a participant or 
participants that was sufficient to reduce the loan to within the 
originating bank's or savings association's lending limit;
    (2) The participant reconfirmed its participation and the 
originating national bank or savings association had no knowledge of 
any information that would permit the participant to withhold its 
participation; and
    (3) The participation was to be funded by close of business of the 
originating national bank's or savings association's next business day.
* * * * *
    (s) Qualifying central counterparty has the same meaning as this 
term has in 12 CFR Part 3, Appendix C, Section 2.
* * * * *
    (u) Qualifying master netting agreement has the same meaning as 
this term has in 12 CFR part 3, Appendix C, Section 2.
* * * * *
    (x) Residential housing units mean:
    (1) Homes (including a dwelling unit in a multi-family residential 
property such as a condominium or a cooperative);
    (2) Combinations of homes and business property (i.e., a home used 
in part for business);
    (3) Other real estate used for primarily residential purposes other 
than a home (but which may include homes);
    (4) Combinations of such real estate and business property 
involving only minor business use (i.e., where no more than 20 percent 
of the total appraised value of the real estate is attributable to the 
business use);
    (5) Farm residences and combinations of farm residences and 
commercial farm real estate;
    (6) Property to be improved by the construction of such structures; 
or
    (7) Leasehold interests in the above real estate.
* * * * *
    (aa) Securities financing transaction means a repurchase agreement, 
reverse repurchase agreement, securities lending transaction, or 
securities borrowing transaction.
* * * * **COM019*

0
3a. Effective January 1, 2013, Sec.  32.2 is amended by removing newly 
redesignated paragraph (q)(1)(vii), removing the semicolon and the word 
``and'' at the end of newly redesignated paragraph (q)(1)(vi) and 
adding in its place a period, and adding the word ``and'' at the end of 
newly redesignated paragraph (q)(1)(v).

0
4. Section 32.3 is amended by:
0
a. In paragraphs (a) and (b) adding the phrase ``or savings 
association's'' after the word ``bank's'', wherever it appears;
0
b. In paragraphs (a) and (b), adding the phrase ``or savings 
association'' after the word ``bank'', wherever it appears;
0
c. In the first sentence of paragraph (a), removing the phrase ``in 
Sec.  32.2(n)'' and adding in its place the phrase ``in Sec.  
32.2(v)'';
0
d. In paragraph (b)(1)(i), removing the phrase ``in Sec.  32.2(o)'' and 
replacing it with the phrase ``in Sec.  32.2(w)'';
0
e. In paragraph (b)(2)(i), removing the phrase ``at Sec.  32.2(e)'' and 
replacing it with the phrase ``at Sec.  32.2(f)'';
0
g. In paragraph (b)(5) introductory text, removing the phrase ``by 
Sec.  32.2(m)'' and replacing it with the phrase ``by Sec.  32.2(t);
0
h. In paragraph (c) introductory text, adding the phrase ``, or 12 
U.S.C. 1464(u), as applicable,'' after the phrase ``12 U.S.C. 84'';
0
i. In paragraph (c)(1)(ii), by adding the phrase ``or 12 U.S.C. 
1464(u), as applicable,'' after the phrase ``12 U.S.C. 84'';

[[Page 37278]]

0
j. Revising paragraphs (c)(2) and (c)(3)(ii) to read as set forth 
below;
0
k. In the first sentence of paragraph (c)(4)(ii)(B), paragraphs 
(c)(5)(i), (c)(6) introductory text, (c)(9)(i), and (c)(10)(i), 
removing the word ``bank'', whenever it appears, and adding in its 
place with the phrase ``national bank or savings association'';
0
l. In paragraphs (c)(4)(ii)(B) and (c)(6)(i), adding the phrase ``or 
savings association's'' after the word ``bank's'';
0
m. In the second sentence of paragraph (c)(4)(ii)(B), and paragraphs 
(c)(5)(ii), (c)(6)(i) and (c)(6)(ii)(B), the first sentence of 
paragraph (c)(7), and paragraphs (c)(9)(iii) and (iv) and (c)(10)(iii) 
through (vi), adding the phrase ``or savings association'' after the 
word ``bank'' whenever it appears;
0
n. In paragraph (c)(7), removing the word ``Comptroller'', wherever it 
appears, and adding in its place the phrase ``appropriate Federal 
banking agency''; and
0
o. Adding paragraphs (c)(11). (c)(12) and (d).
    The addition and revisions read as follows.


Sec.  32.3  Lending limits.

* * * * *
    (c) * * *
    (2) Bankers' acceptances. A national bank's or savings 
association's acceptance of drafts eligible for rediscount under 12 
U.S.C. 372 and 373 or 12 U.S.C. 1464(c)(1)(M), as applicable, or a 
national bank's or savings association's purchase of acceptances 
created by other banks or savings associations that are eligible for 
rediscount under those sections; but not including--
    (i) A national bank's or savings association's acceptance of drafts 
ineligible for rediscount (which constitutes a loan by the bank or 
savings association to the customer for whom the acceptance was made, 
in the amount of the draft);
    (ii) A national bank's or savings association's purchase of 
ineligible acceptances created by other banks or savings associations 
(which constitutes a loan from the purchasing bank or savings 
association to the accepting bank or savings association, in the amount 
of the purchase price); and
    (iii) A national bank's or savings association's purchase of its 
own acceptances (which constitutes a loan to the bank's or savings 
association's customer for whom the acceptance was made, in the amount 
of the purchase price).
    (3) * * *
    (ii) To qualify a loan or extension of credit under paragraph 
(c)(3)(i) of this section, the national bank or savings association 
must perfect a security interest in the collateral under applicable 
law.
* * * * *
    (11) Credit Exposures arising from transactions financing certain 
government securities. Credit exposures arising from securities 
financing transactions in which the securities financed are Type I 
securities, as defined in 12 CFR 1.2(j), in the case of national banks, 
or securities listed in section 5(c)(1)(C), (D), (E), and (F) of HOLA 
and general obligations of a state or subdivision as listed in section 
5(c)(1)(H) of HOLA, 12 U.S.C. 1464(c)(1)(C), (D), (E), (F), and (H), in 
the case of savings associations.
    (12) Intraday credit exposures. Intraday credit exposures arising 
from a derivative transaction or securities financing transaction.
    (d) Special lending limits for savings associations. (1) $500,000 
exception for savings associations. If a savings association's 
aggregate lending limitation calculated under paragraph (a) of this 
section is less than $500,000, notwithstanding this limitation in 
paragraph (a) of this section, such savings association may have total 
loans and extensions of credit, for any purpose, to one borrower 
outstanding at one time not to exceed $500,000.
    (2) Loans by savings associations to develop domestic residential 
housing units. (i) Subject to paragraph (d)(2)(ii) of this section, a 
savings association may make loans to one borrower to develop domestic 
residential housing units, not to exceed the lesser of $30,000,000 or 
30 percent of the savings association's unimpaired capital and 
unimpaired surplus, including all loans and extensions of credit 
subject to paragraph (a) of this section, provided that:
    (A) The savings association is, and continues to be, in compliance 
with its capital requirements under part 167 of this chapter.
    (B) The appropriate Federal banking agency permits, subject to 
conditions it may impose, the savings association to use the higher 
limit set forth under this paragraph (d)(2)(i). A savings association 
that meets the requirements of paragraphs (d)(2)(i)(A), (C), and (D) of 
this section and that meets the requirements for ``expedited 
treatment'' under 12 CFR 116.5 or 12 CFR 390.101 may use the higher 
limit set forth under paragraph (d)(2)(i) if the savings association 
has filed a notice with the appropriate Federal banking agency that it 
intends to use the higher limit at least 30 days prior to the proposed 
use. A savings association that meets the requirements of paragraphs 
(d)(2)(i)(A), (C), and (D) of this section and that meets the 
requirements for ``standard treatment'' under 12 CFR 116.5 or 12 CFR 
390.101 may use the higher limit set forth under this paragraph 
(d)(2)(i) if the savings association has filed an application with the 
appropriate Federal banking agency and the agency has approved the use 
the higher limit;
    (C) The loans and extensions of credit made under this paragraph 
(d)(2)(i) of this section to all borrowers do not, in aggregate, exceed 
150 percent of the savings association's unimpaired capital and 
unimpaired surplus;
    (D) The loans and extensions of credit made under paragraph 
(d)(2)(i) of this section comply with the applicable loan-to-value 
requirements.
    (ii) The authority of a savings association to make a loan or 
extension of credit under the exception in paragraph (d)(2)(i) of this 
section ceases immediately upon the association's failure to comply 
with any one of the requirements set forth in paragraph (d)(2)(i) of 
this section or any condition(s) set forth in an order issued by the 
appropriate Federal banking agency under paragraph (d)(2)(i)(B) of this 
section.
    (iii) As used in this section, the term ``to develop'' includes 
each of the various phases necessary to produce housing units as an end 
product, such as acquisition, development and construction; development 
and construction; construction; rehabilitation; and conversion; and the 
term ``domestic'' includes units within the fifty states, the District 
of Columbia, Puerto Rico, the Virgin Islands, Guam, and the Pacific 
Islands.
    (3) Commercial paper and corporate debt securities. In addition to 
the amount allowed under the savings association's combined general 
limit, a savings association may invest up to 10 percent of unimpaired 
capital and unimpaired surplus in the obligations of one issuer 
evidenced by commercial paper or corporate debt securities that are, as 
of the date of purchase, investment grade.

0
5. Section 32.4 is amended by:
0
a. Revising paragraphs (a) introductory text, (a)(2), and (c) to read 
as set forth below;
0
b. In paragraphs (b)(1) introductory text and (b)(2), removing the word 
``bank's'' and adding in its place the phrase ``national bank's or 
savings association's'';
0
c. In paragraphs (b)(1)(i) and (ii), adding the phrase ``or savings 
association's'' after the word ``bank's''.

[[Page 37279]]

    The revisions read as follows:


Sec.  32.4  Calculation of lending limits.

    (a) Calculation date. For purposes of determining compliance with 
12 U.S.C. 84, and 12 U.S.C. 1464(u), as applicable, and this part, a 
national bank or savings association shall determine its lending limit 
as of the most recent of the following dates:
* * * * *
    (2) The date on which there is a change in the bank's or savings 
association's capital category for purposes of 12 U.S.C. 1831o and 12 
CFR 6.3 or 12 CFR 165.3, as applicable.
* * * * *
    (c) More frequent calculations. If the appropriate Federal banking 
agency determines for safety and soundness reasons that a national bank 
or savings association should calculate its lending limit more 
frequently than required by paragraph (a) of this section, the 
appropriate Federal banking agency may provide written notice to the 
national bank or savings association directing it to calculate its 
lending limit at a more frequent interval, and the national bank or 
savings association shall thereafter calculate its lending limit at 
that interval until further notice.

0
6. Section 32.5 is amended by:
0
a. In paragraphs (c)(3), (d)(1), (f)(2) introductory text, and 
(f)(2)(v), removing the word ``bank'', wherever it appears, and adding 
in its place the phrase ``national bank or savings association'';
0
b. In paragraphs (d)(1) and (f)(3)(iii), adding the phrase ``or savings 
association's'' after the word ``bank's'', wherever it appears;
0
c. In paragraph (c)(4), removing the word ``OCC'' and adding in its 
place the phrase ``appropriate Federal banking agency'';
0
d. In paragraph (f)(2)(iv), removing the phrase ``bank's'' and adding 
in its place the phrase ``national bank's or savings association's''; 
and
0
e. Revising paragraph (f)(3)(ii) introductory text.
    The revision reads as follows.


Sec.  32.5  Combination rules.

* * * * *
    (f) * * *
    (3) * * *
    (ii) Qualifying restructuring. Loans and other extensions of credit 
to a foreign government, its agencies, and instrumentalities will 
qualify for the non-combination process under paragraph (f)(3)(i) of 
this section only if they are restructured in a sovereign debt 
restructuring approved by the appropriate Federal banking agency, upon 
request by a national bank or savings association for application of 
the non combination rule. The factors that the appropriate Federal 
banking agency will use in making this determination include, but are 
not limited to, the following:
* * * * *

0
7. Section 32.6 is revised to read as follows:


Sec.  32.6  Nonconforming loans and extensions of credit.

    (a) A loan or extension of credit, within a national bank's or 
savings association's legal lending limit when made, will not be deemed 
a violation but will be treated as nonconforming if the loan or 
extension of credit is no longer in conformity with the bank's or 
savings association's lending limit because--
    (1) The bank's or savings association's capital has declined, 
borrowers have subsequently merged or formed a common enterprise, 
lenders have merged, or the lending limit or capital rules have 
changed;
    (2) Collateral securing the loan to satisfy the requirements of a 
lending limit exception has declined in value; or
    (3) In the case of a credit exposure arising from a transaction 
identified in Sec.  32.9(a) and measured by the Internal Model Method 
specified in Sec.  32.9(b)(1)(i) or Sec.  32.9 (c)(1)(i), the credit 
exposure subject to the lending limits of 12 U.S.C. 84 or 12 U.S.C. 
1464(u), as applicable, or this part increases after execution of the 
transaction.
    (b) A national bank or savings association must use reasonable 
efforts to bring a loan or extension of credit that is nonconforming as 
a result of paragraph (a)(1) or (a)(3) of this section into conformity 
with the bank's or savings association's lending limit unless to do so 
would be inconsistent with safe and sound banking practices.
    (c) A national bank or savings association must bring a loan that 
is nonconforming as a result of circumstances described in paragraph 
(a)(2) of this section into conformity with the bank's or savings 
association's lending limit within 30 calendar days, except when 
judicial proceedings, regulatory actions or other extraordinary 
circumstances beyond the bank's or savings association's control 
prevent it from taking action.

0
8. Section 32.7 is amended by:
0
a. Revising the paragraph heading;
0
b. Removing the phrase ``special lending limits'' in paragraphs (a)(5), 
(b) introductory text, and (e), and adding in its place the phrase 
``supplemental lending limits''.
0
b. In paragraphs (a)(1), (a)(3), and (e), adding the phrase ``or 
savings association'' after the phrases ``a national bank'', ``a 
bank'', and ``the national bank'', wherever they appear;
0
c. In paragraphs (a)(1) and (a)(3), add the phrase ``or eligible 
savings association'' after the phrase ``eligible national bank'';
0
d. Revise paragraphs (a)(2), (b)(1), (c), and (d) to read as follows;
0
e. In paragraphs (a)(4), (a)(5), and (b)(3), adding the phrase ``or 
savings association's'' after the word ``bank's'', wherever it appears;
0
f. In paragraph (b) introductory text, add the phrase ``or eligible 
savings association'' after the word ``bank'' in the first sentence.
    The revisions read as follows.


Sec.  32.7  Residential real estate loans, small business loans, and 
small farm loans (``Supplemental Lending Limits Program'').

    (a) * * *
    (2) In addition to the amount that a national bank or savings 
association may lend to one borrower under Sec.  32.3, an eligible 
national bank or eligible savings association may make small business 
loans or extensions of credit to one borrower in the lesser of the 
following two amounts: 10 percent of its capital and surplus; or the 
percent of its capital and surplus, in excess of 15 percent, that a 
state bank is permitted to lend under the state lending limit that is 
available for small business loans or unsecured loans in the state 
where the main office of the national bank or home office of the 
savings association is located.
* * * * *
    (b) * * *
    (1) Certification that the bank or savings association is an 
``eligible bank'' or ``eligible savings association'';
* * * * *
    (c) Duration of approval. Except as provided in paragraph (d) of 
this section, a bank or savings association that has received 
appropriate Federal banking agency approval may continue to make loans 
and extensions of credit under the supplemental lending limits in 
paragraphs (a)(1), (2), and (3) of this section, provided the bank or 
savings association remains an ``eligible bank'' or ``eligible savings 
association.''
    (d) Discretionary termination of authority. The appropriate Federal 
banking agency may rescind a bank's or savings association's authority 
to use the supplemental lending limits in paragraphs (a)(1), (2), and 
(3) of this section based upon concerns about credit quality, undue 
concentrations in the bank's or savings association's portfolio of 
residential real estate, small

[[Page 37280]]

business, or small farm loans, or concerns about the bank's or savings 
association's overall credit risk management systems and controls. The 
bank or savings association must cease making new loans or extensions 
of credit in reliance on the supplemental lending limits upon receipt 
of written notice from the appropriate Federal banking agency that its 
authority has been rescinded.
* * * * *


Sec.  32.8  [Amended]

0
9. Section 32.8 is amended by:
0
a. Adding the phrase ``or savings association'' after the phrase 
``national bank'' and the phrase ``or eligible savings association'' 
after the phrase ``eligible bank''; and
0
b. Removing the word ``OCC'', wherever it appears, and adding in its 
place the phrase ``appropriate Federal banking agency''.

0
10. Section 32.9 is added to read as follows:


Sec.  32.9  Credit exposure arising from derivative and securities 
financing transactions.

    (a) Scope. This section sets forth the rules for calculating the 
credit exposure arising from a derivative transaction or a securities 
financing transaction entered into by a national bank or savings 
association for purposes of determining the bank's or savings 
association's lending limit pursuant to 12 U.S.C. 84 or 12 U.S.C. 
1464(u), as applicable, and this part.
    (b) Derivative transactions. (1) Non-credit derivatives. Subject to 
paragraphs (b)(2) and (b)(3) of this section, a national bank or 
savings association shall calculate the credit exposure to a 
counterparty arising from a derivative transaction by one of the 
following methods. Subject to paragraph (b)(3) of this section, a 
national bank or savings association shall use the same method for 
calculating counterparty credit exposure arising from all of its 
derivative transactions.
    (i) Internal Model Method. (A) Credit exposure. The credit exposure 
of a derivative transaction under the Internal Model Method shall equal 
the sum of the current credit exposure of the derivative transaction 
and the potential future credit exposure of the derivative transaction.
    (B) Calculation of current credit exposure. A bank or savings 
association shall determine its current credit exposure by the mark-to-
market value of the derivative contract. If the mark-to-market value is 
positive, then the current credit exposure equals that mark-to-market 
value. If the mark to market value is zero or negative, than the 
current credit exposure is zero.
    (C) Calculation of potential future credit exposure. A bank or 
savings association shall calculate its potential future credit 
exposure by using an internal model that has been approved for purposes 
of 12 CFR part 3, Appendix C, Section 53, 12 CFR part 167, Appendix C, 
Section 53, or 12 CFR part 390, subpart Z, Appendix A, Section 53, as 
appropriate, or any other appropriate model approved by the appropriate 
Federal banking agency.
    (D) Net credit exposure. A bank or savings association that 
calculates its credit exposure by using the Internal Model Method 
pursuant to this paragraph (b)(1)(i) may net credit exposures of 
derivative transactions arising under the same qualifying master 
netting agreement.
    (ii) Conversion Factor Matrix Method. The credit exposure arising 
from a derivative transaction under the Conversion Factor Matrix Method 
shall equal and remain fixed at the potential future credit exposure of 
the derivative transaction as determined at the execution of the 
transaction by reference to Table 1 of this section.

             Table 1--Conversion Factor Matrix for Calculating Potential Future Credit Exposure \1\
----------------------------------------------------------------------------------------------------------------
                                                                                                   Other \3\
                                                                                                   (includes
      Original maturity \2\           Interest rate     Foreign exchange         Equity         commodities and
                                                          rate and gold                         precious metals
                                                                                                 except gold)
----------------------------------------------------------------------------------------------------------------
1 year or less...................                .015                .015                .20                 .06
Over 1 to 3 years................                .03                 .03                 .20                 .18
Over 3 to 5 years................                .06                 .06                0.20                0.30
Over 5 to 10 years...............                .12                 .12                0.20                 .60
Over ten years...................                .30                 .30                 .20                1.0
----------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by
  the number of remaining payments in the derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is
  settled and the terms are reset so that the market value of the contract is zero, the remaining maturity
  equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity
  of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ Transactions not explicitly covered by any other column in the Table are to be treated as ``Other.''

    (iii) Remaining Maturity Method. The credit exposure arising from a 
derivative transaction under the Remaining Maturity Method shall equal 
the greater of zero or the sum of the current mark-to-market value of 
the derivative transaction added to the product of the notional amount 
of the transaction, the remaining maturity in years of the transaction, 
and a fixed multiplicative factor determined by reference to Table 2 of 
this section.

                       Table 2--Remaining Maturity Factor for Calculating Credit Exposure
----------------------------------------------------------------------------------------------------------------
                                                                                                   Other \1\
                                                                                                   (includes
                                     Interest rate     Foreign exchange         Equity          commodities and
                                                         rate and gold                          precious metals
                                                                                                 except gold)
----------------------------------------------------------------------------------------------------------------
Multiplicative Factor...........               1.5%                1.5%                  6%                  6%
----------------------------------------------------------------------------------------------------------------
\1\ Transactions not explicitly covered by any other column in the Table are to be treated as ``Other.''


[[Page 37281]]

    (2) Credit Derivatives. (i) Notwithstanding paragraph (b)(1) of 
this section, a national bank or savings association that uses the 
Conversion Factor Matrix Method or Remaining Maturity Method, or that 
uses the Internal Model Method without entering an effective margining 
arrangement as defined in Sec.  32.2(l), shall calculate the 
counterparty credit exposure arising from credit derivatives entered by 
the bank or savings association by adding the net notional value of all 
protection purchased from the counterparty on each reference entity.
    (ii) A national bank or savings association shall calculate the 
credit exposure to a reference entity arising from credit derivatives 
entered by the bank or savings association by adding the notional value 
of all protection sold on the reference entity. However, the bank or 
savings association may reduce its exposure to a reference entity by 
the amount of any eligible credit derivative purchased on that 
reference entity from an eligible protection provider.
    (3) Mandatory use of Internal Model Method. The appropriate Federal 
banking agency may require a national bank or savings association to 
use the Internal Model Method set forth in paragraph (b)(1)(i) of this 
section, the Conversion Factor Matrix Method set forth in paragraph 
(b)(1)(ii) of this section, or the Remaining Maturity Method set forth 
in paragraph (b)(1)(iii) of this section to calculate the credit 
exposure of derivative transactions if it finds that such method is 
necessary to promote the safety and soundness of the bank or savings 
association.
    (c) Securities financing transactions. (1) In general. Except as 
provided by paragraph (c)(2) of this section, a national bank or 
savings association shall calculate the credit exposure arising from a 
securities financing transaction by one of the following methods. A 
national bank or savings association shall use the same method for 
calculating credit exposure arising from all of its securities 
financing transactions.
    (i) Internal Model Method. A national bank or savings association 
may calculate the credit exposure of a securities financing transaction 
by using an internal model approved by the appropriate Federal banking 
agency for purposes of 12 CFR part 3, Appendix C, Section 32(d), 12 CFR 
part 167, Appendix C, Section 32(d), or 12 CFR part 390, subpart Z, 
Appendix A, Section 32(d), as appropriate, or any other appropriate 
model approved by the appropriate Federal banking agency.
    (ii) Non-Model Method. A national bank or savings association may 
calculate the credit exposure of a securities financing transaction as 
follows:
    (A) Repurchase agreement. The credit exposure arising from a 
repurchase agreement shall equal and remain fixed at the market value 
at execution of the transaction of the securities transferred to the 
other party less cash received.
    (B) Securities lending. (1) Cash collateral transactions. The 
credit exposure arising from a securities lending transaction where the 
collateral is cash shall equal and remain fixed at the market value at 
execution of the transaction of securities transferred less cash 
received.
    (2) Non-cash collateral transactions. The credit exposure arising 
from a securities lending transaction where the collateral is other 
securities shall equal and remain fixed as the product of the higher of 
the two haircuts associated with the two securities, as determined in 
Table 3 of this section, and the higher of the two par values of the 
securities.
    (C) Reverse repurchase agreements. The credit exposure arising from 
a reverse repurchase agreement shall equal and remain fixed as the 
product of the haircut associated with the collateral received, as 
determined in Table 3 of this section, and the amount of cash 
transferred.
    (D) Securities borrowing. (1) Cash collateral transactions. The 
credit exposure arising from a securities borrowed transaction where 
the collateral is cash shall equal and remain fixed as the product of 
the haircut on the collateral received, as determined in Table 3 of 
this section, and the amount of cash transferred to the other party.
    (2) Non-cash collateral transactions. The credit exposure arising 
from a securities borrowed transaction where the collateral is other 
securities shall equal and remain fixed as the product of the higher of 
the two haircuts associated with the two securities, as determined in 
Table 3 of this section, and the higher of the two par values of the 
securities.

                      Table 3--Collateral Haircuts
------------------------------------------------------------------------
                                                        Haircut without
                                  Residual maturity         currency
                                                          mismatch \1\
------------------------------------------------------------------------
                           SOVEREIGN ENTITIES
------------------------------------------------------------------------
OECD Country Risk               <= 1 year............              0.005
 Classification \2\ 0-1.
                                >1 year, <= 5 years..               0.02
                                5 years..............               0.04
OECD Country Risk               <= 1 year............               0.01
 Classification 2-3.
                                >1 year, <= 5 years..               0.03
                                5 years..............               0.06
------------------------------------------------------------------------
    CORPORATE AND MUNICIPAL BONDS THAT ARE BANK-ELIGIBLE INVESTMENTS
------------------------------------------------------------------------
                                Residual maturity for   Haircut without
                                    debt securities    currency mismatch
------------------------------------------------------------------------
All...........................  <= 1 year............               0.02
All...........................  >1 year, <= 5 years..               0.06
All...........................  > 5 years............               0.12
------------------------------------------------------------------------


 
 
------------------------------------------------------------------------
                        OTHER ELIGIBLE COLLATERAL
------------------------------------------------------------------------
Main index \3\ equities (including       0.15
 convertible bonds).
Other publicly traded equities           0.25
 (including convertible bonds).

[[Page 37282]]

 
Mutual funds...........................  Highest haircut applicable to
                                          any security in which the fund
                                          can invest
Cash collateral held...................  0
------------------------------------------------------------------------
\1\ In cases where the currency denomination of the collateral differs
  from the currency denomination of the credit transaction, an addition
  8 percent haircut will apply.
\2\ OECD Country Risk Classification means the country risk
  classification as defined in Article 25 of the OECD's February 2011
  Arrangement on Officially Supported Export Credits Arrangement.
\3\ Main index means the Standard & Poor's 500 Index, the FTSE All-World
  Index, and any other index for which the covered company can
  demonstrate to the satisfaction of the Federal Reserve that the
  equities represented in the index have comparable liquidity, depth of
  market, and size of bid-ask spreads as equities in the Standard &
  Poor's 500 Index and FTSE All-World Index.

    (2) Mandatory use of Internal Model Method. The appropriate Federal 
banking agency may require a national bank or savings association to 
use either the Internal Model Method set forth in paragraph (c)(1)(i) 
of this section or the Non-Model Method set forth in paragraph 
(c)(1)(ii) of this section to calculate the credit exposure of 
securities financing transactions if the appropriate Federal banking 
agency finds that such method is necessary to promote the safety and 
soundness of the bank or savings association.

0
11. Appendix A to part 32 is added to read as follows:

Appendix A To Part 32--Interpretations

Section 1. Interrelation of General Limitation With Exception for 
Loans To Develop Domestic Residential Housing Units

    1. The Sec.  32.3(d)(2) exception for loans to one borrower to 
develop domestic residential housing units is characterized in the 
regulation as an ``alternative'' limit. This exceptional $30,000,000 
or 30 percent limitation does not operate in addition to the 15 
percent General Limitation or the 10 percent additional amount a 
savings association may loan to one borrower secured by readily 
marketable collateral, but serves as the uppermost limitation on a 
savings association's lending to any one person once a savings 
association employs this exception.

    Example: Savings Association A's lending limitation as 
calculated under the 15 percent General Limitation is $800, 000. If 
Savings Association A lends Y $800,000 for commercial purposes, 
Savings Association A cannot lend Y an additional $1,600,000, or 30 
percent of capital and surplus, to develop residential housing units 
under the paragraph Sec.  32.3(d)(2) exception. The Sec.  32.3(d)(2) 
exception operates as the uppermost limitation on all lending to one 
borrower (for savings associations that may employ this exception) 
and includes any amounts loaned to the same borrower under the 
General Limitation. Savings Association A, therefore, may lend only 
an additional $800,000 to Y, provided Sec.  32.3(d)(2) prerequisites 
have been met. The amount loaned under the authority of the General 
Limitation ($800,000), when added to the amount loaned under the 
exception ($800,000), yields a sum that does not exceed the 30 
percent uppermost limitation ($1,600,000).

    2. a. This result does not change even if the facts are altered 
to assume that some or all of the $800,000 amount of lending 
permissible under the General Limitation's 15 percent basket is not 
used, or is devoted to the development of domestic residential 
housing units.
    b. In other words, using the above example, if Savings 
Association A lends Y $400,000 for commercial purposes and $300,000 
for residential purposes--both of which would be permitted under its 
$800,000 General Limitation--Savings Association A's remaining 
permissible lending to Y would be: first, an additional $100,000 
under the General Limitation, and then another $800,000 to develop 
domestic residential housing units if the savings association meets 
the paragraph Sec.  32.3(d)(2) prerequisites. (The latter is 
$800,000 because in no event may the total lending to Y exceed 30 
percent of unimpaired capital and unimpaired surplus). If Savings 
Association A did not lend Y the remaining $100,000 permissible 
under the General Limitation, its permissible loans to develop 
domestic residential housing units under Sec.  32.3(d)(2) would be 
$900,000 instead of $800,000 (the total loans to Y would still equal 
$1,600,000).
    3. In short, under the Sec.  32.3(d)(2) exception, the 30 
percent or $30,000,000 limit will always operate as the uppermost 
limitation, unless the savings association does not avail itself of 
the exception and merely relies upon its General Limitation.

Section 2. Interrelationship Between the General Limitation and the 
150 Percent Aggregate Limit on Loans to All Borrowers To Develop 
Domestic Residential Housing Units

    Numerous questions have been received regarding the allocation 
of loans between the different lending limit ``baskets,'' i.e., the 
15 percent General Limitation basket and the 30 percent Residential 
Development basket. In general, the inquiries concern the manner in 
which a savings association may ``move'' a loan from the General 
Limitation basket to the Residential Development basket. The 
following example is intended to provide guidance:
    Example: Savings Association A's General Limitation under Sec.  
32.3(a) is $15 million. In January, Savings Association A makes a 
$10 million loan to Borrower to develop domestic residential housing 
units. At the time the loan was made, Savings Association A had not 
received approval under an order issued by the appropriate Federal 
banking agency to avail itself of the residential development 
exception to lending limits. Therefore, the $10 million loan is made 
under Savings Association A's General Limitation.

    2. In June, Savings Association A receives authorization to lend 
under the Residential Development exception. In July, Savings 
Association A lends $3 million to Borrower to develop domestic 
residential housing units. In August, Borrower seeks an additional 
$12 million commercial loan from Savings Association A. Savings 
Association A cannot make the loan to Borrower, however, because it 
already has an outstanding $10 million loan to Borrower that counts 
against Savings Association A's General Limitation of $15 million. 
Thus, Savings Association A may lend only up to an additional $5 
million to Borrower under the General Limitation.
    3. However, Savings Association A may be able to reallocate the 
$10 million loan it made to Borrower in January to its Residential 
Development basket provided that: (1) Savings Association A has 
obtained authority under an order issued by the appropriate Federal 
banking agency to avail itself of the additional lending authority 
for residential development and maintains compliance with all 
prerequisites to such lending authority; (2) the original $10 
million loan made in January constitutes a loan to develop domestic 
residential housing units as defined; and (3) the housing unit(s) 
constructed with the funds from the January loan remain in a stage 
of ``development'' at the time Savings Association A reallocates the 
loan to the domestic residential housing basket. The project must be 
in a stage of acquisition, development, construction, 
rehabilitation, or conversion in order for the loan to be 
reallocated.
    4. If Savings Association A is able to reallocate the $10 
million loan made to Borrower in January to its Residential 
Development basket, it may make the $12 million commercial loan 
requested by Borrower in August. Once the January loan is 
reallocated to the Residential Development basket, however, the $10 
million loan counts towards Savings Association A's 150 percent 
aggregate limitation on loans to all borrowers under the residential 
development basket (Sec.  32.3(d)(2)).
    5. If Savings Association A reallocates the January loan to its 
domestic residential housing basket and makes an additional $12 
million commercial loan to Borrower, Savings Association A's totals 
under the respective limitations would be: $12 million under the 
General Limitation; and $13 million under the Residential 
Development limitation. The full $13 million residential development 
loan counts toward Savings Association A's aggregate 150 percent 
limitation.

PART 159--SUBORDINATE ORGANIZATIONS

0
12. The authority citation for part 159 continues to read as follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1828, 
5412(b)(2)(B).

[[Page 37283]]

Sec.  159.3  [Amended]

0
13. Section 159.3 is amended, in paragraph (k) introductory text, by 
removing ``Sec.  160.93 of this chapter'' and adding in its place the 
phrase ``12 CFR part 32''.

PART 160--LENDING AND INVESTMENTS

0
14. The authority citation for part 160 continues to read as follows:

    Authority:  12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.


Sec.  160.40  [Amended]

0
15. Section 160.40 is amended, in paragraph (a)(3), by removing ``Sec.  
160.93(c) of this part'' and adding in its place the phrase ``Sec.  
32.3(a) of this chapter''.


Sec.  160.60  [Amended]

0
16. Section 160.60 is amended, in paragraph (b)(3), by removing 
``Sec. Sec.  160.93 and 163.43 of this chapter'' and adding in its 
place the phrase ``12 CFR part 32 and Sec.  163.43 of this chapter''.


Sec.  160.93  [Amended]

0
17. Section 160.93 is removed.

    Dated: June 14, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-15004 Filed 6-20-12; 8:45 am]
BILLING CODE 4810-33-P