[Federal Register Volume 77, Number 195 (Tuesday, October 9, 2012)]
[Rules and Regulations]
[Pages 61229-61238]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-24375]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 9
[Docket No. OCC-2011-0023]
RIN 1557-AD37
Short-Term Investment Funds
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Final rule.
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SUMMARY: This final rule revises the requirements imposed on national
banks pursuant to the OCC's short-term investment fund (STIF) rule
(STIF Rule). Regulations governing Federal savings associations (FSAs)
require compliance with the national bank STIF Rule. The final rule
adds safeguards designed to address the risk of loss to a STIF's
principal, including measures governing the nature of a STIF's
investments, ongoing monitoring of its mark-to-market value and
forecasting of potential changes in its mark-to-market value under
adverse market conditions, greater transparency and regulatory
reporting about a STIF's holdings, and procedures to protect fiduciary
accounts from undue dilution of their participating interests in the
event that the STIF loses the ability to maintain a stable net asset
value (NAV).
DATES: The final rule is effective on July 1, 2013. Comments are
solicited only on the Paperwork Reduction Act aspects of this final
rule and must be submitted by November 8, 2012.
ADDRESSES: Comments on the Paperwork Reduction Act aspects of this
final rule should be directed to: Communications Division, Office of
the Comptroller of the Currency, Mailstop 2-3, Attention: 1557-NEW, 250
E Street SW., Washington, DC 20219. In addition, comments may be sent
by fax to (202) 874-5274 or by electronic mail to
regs.comments@occ.treas.gov.
FOR FURTHER INFORMATION CONTACT: Joel Miller, Group Leader, Asset
Management (202) 874-4493, David Barfield, National Bank Examiner,
Market Risk (202) 874-1829, Patrick T. Tierney, Counsel, Legislative
and Regulatory Activities Division (202) 874-5090, Suzette H. Greco,
Assistant Director, or Adam Trost, Senior Attorney, Securities and
Corporate Practices Division (202) 874-5210, Office of the Comptroller
of the Currency, 250 E Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
A. Short-Term Investment Funds
A collective investment fund (CIF) is a bank-managed fund that
holds pooled fiduciary assets that meet specific criteria established
by the OCC fiduciary activities regulation at 12 CFR 9.18. Each CIF is
established under a ``Plan'' that details the terms under which the
bank manages and administers the fund's assets. The bank acts as a
fiduciary for the CIF and holds legal title to the fund's assets.
Participants in a CIF are the beneficial owners of the fund's assets.
Each participant owns an undivided interest in the aggregate assets of
a CIF; a participant does not directly own any specific asset held by a
CIF.\1\
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\1\ 12 CFR 9.18.
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A fiduciary account's investment in a CIF is called a
``participating interest.'' Participating interests in a CIF are not
insured by the Federal Deposit Insurance Corporation and are not
subject to potential claims by a bank's creditors. In addition, a
participating interest in a CIF cannot be pledged or otherwise
encumbered in favor of a third party.
The general rule for valuation of a CIF's assets specifies that a
CIF admitting a fiduciary account (that is, allowing the fiduciary
account, in effect, to purchase its proportionate interest in the
assets of the CIF) or withdrawing the fiduciary account (that is,
allowing the fiduciary account, in effect, to redeem the value of its
proportionate interest in the CIF) may only do so on the basis of a
valuation of the CIF's assets, as of the admission or withdrawal date,
based on the mark-to-market value of the CIF's
[[Page 61230]]
assets.\2\ This general valuation rule is designed to protect all
fiduciary accounts participating in the CIF from the risk that other
accounts will be admitted or withdrawn at valuations that dilute the
value of existing participating interests in the CIF.
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\2\ 12 CFR 9.18(b)(5)(i). If the bank cannot readily ascertain
market value as of the valuation date, the bank generally must use a
fair value for the asset, determined in good faith. 12 CFR
9.18(b)(4)(ii)(A).
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A STIF is a type of CIF that permits a bank to value the STIF's
assets on an amortized cost basis, rather than at mark-to-market value,
for purposes of admissions and withdrawals. This is an exception to the
general rule of market valuation. In order to qualify for this
exception under the OCC's current Part 9 fiduciary activities
regulation, a STIF's Plan must require the bank to: (1) Maintain a
dollar-weighted average portfolio maturity of 90 days or less; (2)
accrue on a straight-line or amortized basis the difference between the
cost and anticipated principal receipt on maturity; and (3) hold the
fund's assets until maturity under usual circumstances.\3\ Because a
STIF's investments are limited to shorter-term assets and those assets
generally are required to be held to maturity, differences between the
amortized cost and mark-to-market value of the assets will be rare,
absent atypical market conditions or an impaired asset.
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\3\ 12 CFR 9.18(b)(4)(ii)(B).
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The OCC's STIF Rule governs STIFs managed by national banks. In
addition, regulations adopted by the Office of Thrift Supervision, now
recodified as OCC rules pursuant to Title III of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,\4\ have long required FSAs
to comply with the requirements of the OCC's STIF Rule.\5\ Thus, the
proposed revisions to the national bank STIFs Rule would apply to a FSA
that establishes and administers a STIF. As of June 30, 2012, there was
approximately $118 billion invested in STIFs administered by national
banks and there were no STIFs administered by FSAs reported.\6\
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\4\ 76 FR 48950 (2011).
\5\ 12 CFR 150.260.
\6\ Fifteen national banks collectively reported STIF
investments that they administer. Other types of institutions
managing certain types of CIFs may also follow the requirements of
the OCC's STIF Rule. For example, New York state law provides that
all investments in short-term investment common trust funds may be
valued at cost, if the plan of operation requires that: (i) The type
or category of investments of the fund shall comply with the rules
and regulations of the Comptroller of the Currency pertaining to
short-term investment funds and (ii) in computing income, the
difference between cost of investment and anticipated receipt on
maturity of investment shall be accrued on a straight-line basis.
See N.Y. Comp. Codes R. & Regs. Tit. 3, Sec. 22.23 (2010).
Additionally, in order to retain their tax-exempt status, common
trust funds must operate in compliance with Sec. 9.18 as well as
the federal tax laws. See 26 U.S.C. 584. The OCC does not have
access to comprehensive data quantifying investments held by STIFs
administered by other types of institutions pursuant to legal
requirements incorporating the OCC's STIF Rule. Although the direct
scope of the STIF Rule provisions in Sec. 9.18 of the OCC's
regulations is national banks and Federal branches and agencies of
foreign banks acting in a fiduciary capacity (12 CFR 9.1(c)), the
nomenclature of the STIF Rule refers simply to ``banks.'' For the
sake of convenience, the OCC continues this approach and also
applies the same convention to the discussion of the STIF final
rule.
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This final rule enhances protections provided to STIF participants
and reduces risks to banks that administer STIFs. The final rule does
not affect the obligation that STIFs meet the CIF requirements
described in 12 CFR Part 9, which allows national banks to maintain and
invest fiduciary assets, consistent with applicable law.\7\ Also,
national banks managing CIFs are required to adopt and follow written
policies and procedures that are adequate to maintain their fiduciary
activities in compliance with applicable law.\8\ Additionally, 12 CFR
Part 9 will continue to require a STIF's bank manager, at least once
during each calendar year, to conduct a review of all assets of each
fiduciary account for which the bank has investment discretion to
evaluate whether they are appropriate, individually and collectively,
for the account.\9\ These examples of CIF requirements applicable to
STIFs are not exclusive. Other requirements apply, and a bank must
comply with all applicable requirements of 12 CFR Part 9 when acting as
a fiduciary for a CIF.
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\7\ 12 CFR 9.2(b).
\8\ 12 CFR 9.5.
\9\ 12 CFR 9.6(c).
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In light of the issuance of this final rule, a bank administering a
STIF must revise the written Plan required by 12 CFR 9.18(b)(1).
B. Comparison to Other Products That Seek To Maintain a Stable NAV
There are other types of funds that seek to maintain a stable NAV.
The most significant of these from a financial market presence
standpoint are ``money market mutual funds'' (MMMFs). These funds are
organized as open-ended management investment companies and are
regulated by the U.S. Securities and Exchange Commission (``SEC'')
pursuant to the Investment Company Act of 1940, particularly pursuant
to the provisions of SEC Rule 2a-7 thereunder (``Rule 2a-7'').\10\
MMMFs seek to maintain a stable share price, typically $1.00 a share.
In this regard, they are similar to STIFs.
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\10\ 15 U.S.C. 80a; 17 CFR 270.2a-7. Because STIFs are a form of
CIF, they are generally exempt from the SEC's rules under the
Investment Company Act. STIFs used exclusively for (1) the
collective investment of money by a bank in its fiduciary capacity
as trustee, executor, administrator, or guardian and (2) the
collective investment of assets of certain employee benefit plans
are exempt from the Investment Company Act under 15 U.S.C. 80a-
3(c)(3) and (c)(11), respectively. MMMFs are not subject to
comparable restrictions as to the type of participant who may invest
in the fund or the purpose of such investment.
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There are a number of important differences between MMMFs and
STIFs; most significantly, MMMFs are open to retail investors, whereas,
STIFs only are available to authorized fiduciary accounts. MMMFs may be
offered to the investing public and have become a popular product with
retail investors, corporate money managers, and institutional investors
seeking returns equivalent to current short-term interest rates in
exchange for high liquidity and the prospect of protection against the
loss of principal. In contrast to the approximately $118 billion
currently held in STIFs administered by national banks, MMMFs, as of
July 2012, held approximately $2.5 trillion dollars of investor
assets.\11\
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\11\ See http://www.ici.org/research/stats/mmf.
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During the recent period of financial market stress, beginning in
2007 and stretching into 2009, certain types of short-term debt
securities frequently held by MMMFs experienced unusually high
volatility. Concerns by investors that their MMMFs could not maintain a
stable NAV eventually led to investor redemptions out of those funds,
and some funds needed to liquidate sizeable portions of their
securities to meet investor redemption requests. The volume of
redemption requests depressed market prices for short-term debt
instruments, exacerbating the problem for all types of stable NAV
funds.
The President's Working Group on Financial Markets (``PWG''),\12\
after reviewing the market turmoil during the period 2007 through 2009,
recommended that the SEC strengthen the regulation and monitoring of
MMMFs and also recommended that bank regulators consider strengthening
the regulation and monitoring of other types of products that seek to
maintain a stable NAV.\13\
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\12\ The PWG is comprised of the Secretary of the Treasury, the
Chairman of the Board of Governors of the Federal Reserve System,
the Chairman of the Securities and Exchange Commission, and the
Chairman of the Commodity Futures Trading Commission.
\13\ Report of the President's Working Group on Financial
Markets, Money Market Fund Reform Options, p. 35 (Oct. 2010), see
http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf. See also Financial Stability
Oversight Council 2012 Annual Report, pp. 11-12 (July 2012)
available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf.
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The SEC subsequently adopted amendments to Rule 2a-7 to strengthen
the resilience of MMMFs.\14\ The OCC's changes to the STIF Rule issued
today are informed by the SEC's revisions to Rule 2a-7.\15\ In light of
the differences between the MMMF as an investment product and the
STIF--e.g., a bank's fiduciary responsibility to a STIF and
requirements limiting STIF participation to eligible accounts under the
OCC's fiduciary account regulation at 12 CFR part 9--the OCC's rules
differ from the SEC's in certain respects.
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\14\ See Money Market Fund Reform, 75 FR 10060 (Mar. 4, 2010).
\15\ The OCC will continue to evaluate the requirements of 12
CFR Part 9 in light of future policy assessments and initiatives
concerning stable NAV funds, and will take such additional actions
as are appropriate.
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II. Overview of the Proposed Rule
On April 9, 2012, the OCC published proposed amendments to its Part
9 STIF Rule \16\ to add safeguards designed to address participating
interests' risk of loss to a STIF's principal, including measures
governing the nature of a STIF's investments; ongoing monitoring of the
STIF's mark-to-market value and assessment of potential changes in its
mark-to-market value under adverse market conditions; greater
transparency and regulatory reporting about the STIF's holdings; and
procedures to protect fiduciary accounts from undue dilution of their
participating interests in the event that the STIF loses the ability to
maintain a stable NAV. The proposal is described in detail in the
Section-by-Section Analysis section of this SUPPLEMENTARY INFORMATION.
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\16\ 77 FR 21057 (Apr. 9, 2012).
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III. Comments on the Proposed Rule
The comment period for the proposed rule ended on June 8, 2012. The
OCC received a total of nine comments: Three from individuals, three
from trade associations, two from non-bank financial services firms,
and one from a national bank.
In general, commenters supported the proposed rule; however, two
commenters asserted that the proposal should more closely follow the
SEC's 2a-7 MMMF rule. The OCC's proposal, and the final rule issued
today, differs from the SEC's 2a-7 MMMF rule, which reflects the
differences between MMMFs and STIFs--MMMFs are a retail investment
offering, while STIF participation is limited to eligible accounts
under the OCC's fiduciary account regulation at 12 CFR Part 9 and the
exemptions from the Investment Company Act of 1940 relied upon by banks
organizing STIFs.\17\
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\17\ See footnote 10, supra, and accompanying text.
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One commenter noted that a significant portion of STIF assets are
managed by state chartered banks that are not required to comply with
the OCC's STIF Rules and that implementation of the OCC's proposed
changes may thus place national bank STIF administrators at a
competitive disadvantage to state-regulated STIFs and their bank
administrators. The OCC acknowledges this concern, but notes that some
states' laws may require state banks administering certain comparable
funds to comply with the standards the OCC applies to STIFs. In any
case, the OCC has concluded that, on balance, the benefits of the final
rule issued today that enhance protections provided to STIF
participants and reduce risks to banks that administer STIFs outweigh
the competitive issue raised by the commenter.
Additional comments are addressed in the Section-by-Section
Analysis section of this SUPPLEMENTARY INFORMATION.
IV. Section-by-Section Analysis
Effective Date
Some commenters requested that the final rule have a compliance
date in the range of 12 to 16 months after the date of issuance. The
final rule's effective date, which will be same date upon which the OCC
will expect compliance with the rule, is July 1, 2013. This effective
date will provide affected banks with sufficient time to make the
systems, process, and investment changes necessary to implement the
rule. The OCC believes that the implementation period is adequate given
that most affected institutions already are complying with many aspects
of the final rule.
Section 9.18(b)(4)(iii)(A)
STIFs typically maintain stable NAVs in order to meet the
expectations of the fund's bank managers and participating fiduciary
accounts.\18\ To the extent a bank fiduciary offers a STIF with a fund
objective of maintaining a stable NAV, participating accounts and the
OCC expect those STIFs to maintain a stable NAV using amortized cost.
The proposal would require a Plan to have as a primary objective that
the STIF operate with a stable NAV of $1.00 per participating
interest.\19\ The OCC received no comment on the proposed stable $1.00
NAV Plan requirement and adopts it as proposed.
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\18\ For example, many STIF plan participants (e.g., pensions)
have policies, procedures, and operational systems that presume a
stable NAV.
\19\ The OCC expects banks to normalize and treat stable NAVs
operating at a multiple of a $1.00 (e.g., $10 NAV) or fraction of
$1.00 (e.g., $0.5) as operating with a NAV of $1.00 per
participating interest.
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Section 9.18(b)(4)(iii)(B)
The current STIF Rule requires the bank managing a STIF \20\ to
maintain a dollar-weighted average portfolio maturity of 90 days or
less. The current STIF Rule restricts the weighted average maturity of
the STIF's portfolio in order to limit the exposure of participating
fiduciary accounts to certain risks, including interest rate risk. The
proposed rule would change the maturity limits to further reduce such
risks. First, the proposal would reduce the maximum weighted average
portfolio maturity permitted by the rule from 90 days or less to 60
days or less. Second, it would establish a new maturity test that would
limit the portion of a STIF's portfolio that could be held in longer
term variable- or floating-rate securities.
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\20\ The current STIF Rule incorporates this and other measures
through requirements that a bank operate a STIF in accordance with a
written plan that, at a minimum, imposes a series of required
provisions with respect to the STIF. The STIF revisions incorporate
additional measures that require a STIF plan to adopt specific
additional restrictions and procedures.
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1. Dollar-Weighted Average Portfolio Maturity
The final rule amends the ``dollar-weighted average portfolio
maturity'' \21\ requirement of the STIF Rule to 60 days or less.
Currently, banks managing STIFs must maintain a dollar-weighted average
portfolio maturity of 90 days or less.\22\ Securities that have shorter
periods remaining until maturity generally exhibit a lower level of
price volatility in response to interest rate and credit spread
fluctuations and, thus, provide a greater assurance that the STIF will
continue to maintain a stable value.
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\21\ Generally, ``dollar-weighted average portfolio maturity''
means the average time it takes for securities in a portfolio to
mature, weighted in proportion to the dollar amount that is invested
in the portfolio. Dollar-weighted average portfolio maturity
measures the price sensitivity of fixed-income portfolios to
interest rate changes.
\22\ 12 CFR 9.18(b)(4)(ii)(B)(1).
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Having a portfolio weighted towards securities with longer
maturities poses greater risks to participating accounts in a STIF. For
example, a longer dollar-weighted average maturity period increases a
STIF's exposure to interest rate risk. Additionally, longer maturity
periods amplify the effect of widening
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credit spreads on a STIF. Finally, a STIF holding securities with
longer maturity periods generally is exposed to greater liquidity risk
because: (1) Fewer securities mature and return principal on a daily or
weekly basis to be available for possible fiduciary account
withdrawals, and (2) the fund may experience greater difficulty in
liquidating these securities in a short period of time at a reasonable
price.
STIFs with a shorter portfolio maturity period would be better able
to withstand increases in interest rates and credit spreads without
material deviation from amortized cost. Furthermore, in the event
distress in the short-term instrument market triggers increasing rates
of withdrawals from STIFs, the STIFs would be better positioned to
withstand such withdrawals as a greater portion of their portfolios
mature and return principal on a daily or weekly basis and would have
greater ability to liquidate a portion of their portfolio at a
reasonable price.
The OCC received one comment addressing the proposed change to the
dollar-weighted average portfolio maturity from 90 to 60 days. The
commenter asserted that a 60-day dollar-weighted average portfolio
maturity would affect STIFs' ability to manage portfolios in a
declining interest rate environment and increase demand for securities
with shorter interest rate durations. The commenter also stated that
this aspect of the proposal would limit a bank's ability to match the
expected interest rate horizon of assets to the interest rate and
duration of liabilities.
The OCC recognizes the concerns expressed by the commenter;
however, as previously discussed, STIFs with a 60-day dollar-weighted
average portfolio maturity (1) will better withstand increases in
interest rates and credit spreads without material deviation from
amortized cost and (2) be better positioned to withstand withdrawals
during distress in the short-term instrument market. For these reasons,
the 60-day dollar-weighted average portfolio maturity is adopted as
proposed without change.
2. Dollar-Weighted Average Portfolio Life Maturity
The final rule, consistent with the proposal, adds a new maturity
requirement for STIFs, which limits the dollar-weighted average
portfolio life maturity to 120 days or less. The dollar-weighted
average portfolio life maturity is measured without regard to a
security's interest rate reset dates and, thus, limits the extent to
which a STIF can invest in longer-term securities that may expose it to
increased liquidity and credit risk.
The dollar-weighted average portfolio maturity measurement in the
current STIF Rule does not do as much as its name might suggest to
restrict the introduction of certain types of longer-term instruments
into a STIF portfolio. For example, floating rate instruments are
generally treated according to their next reset date, while they may
still be instruments of a longer contractual term that expose the STIF
to higher liquidity and credit risks than an instrument of shorter
maturity. For this reason, the final rule imposes a new dollar-weighted
average portfolio life maturity limitation on the structure of a STIF,
to capture certain credit and liquidity risks not encompassed by the
dollar-weighted average portfolio maturity restriction. The rule
requires that STIFs maintain a dollar-weighted average portfolio life
maturity of 120 days or less, which provides a reasonable balance
between strengthening the resilience of STIFs to credit and liquidity
events while not unduly restricting a bank's ability to invest the
STIF's fiduciary assets in a diversified portfolio of short-term, high
quality debt securities.
One commenter argued that the proposed 120-day dollar-weighted
average portfolio life maturity standard would restrict the ability of
STIFs to acquire high credit quality debt securities with legal final
maturities longer than one year and would restrict STIFs' ability to
diversify fund holdings among multiple types of high quality securities
and issuers. To remedy these issues, the commenter suggested that a
180-day dollar-weighted average portfolio life maturity standard would
be more appropriate.
The OCC believes that the short-term securities markets are
sufficiently diverse in terms of high quality securities and issuers
that implementation of a 120-day dollar-weighted average portfolio life
maturity standard will not be materially detrimental to national banks
and their sponsored STIFs. Furthermore, the OCC believes that a 120-day
dollar-weighted average portfolio life maturity standard strengthens
the resilience of STIFs to credit and liquidity risks, particularly in
volatile markets, which is a systemic benefit that outweighs the
particular concerns raised by the commenter. For these reasons, the OCC
adopts the 120-day dollar-weighted average portfolio life maturity
standard as proposed without change.
3. Determination of Maturity Limits
a. Calculation Method
In determining the dollar-weighted average portfolio maturity of
STIFs under the current rule, national banks generally apply the same
methodology as required by the SEC for MMMFs pursuant to Rule 2a-7.
Dollar-weighted average maturity under Rule 2a-7 is calculated,
generally, by treating each security's maturity as the period remaining
until the date on which, in accordance with the terms of the security,
the principal amount must be unconditionally paid or, in the case of a
security called for redemption, the date on which the redemption
payment must be made. Rule 2a-7 also provides eight exceptions to this
general rule. For example, for certain types of variable-rate
securities, the date of maturity may be the earlier of the date of the
next interest rate reset or the period remaining until the principal
can be recovered through demand. For repurchase agreements, the
maturity is the date on which the repurchase is scheduled to occur,
unless the repurchase agreement is subject to demand for repurchase, in
which case the maturity is the notice period applicable to demand.\23\
Consistent with the proposal, the final rule text specifies that banks
are to apply the same methodology as the SEC requires under Rule 2a-7
for determining dollar-weighted average portfolio maturity and dollar-
weighted average portfolio life maturity.\24\
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\23\ See 17 CFR 270.2a-7(d)(1)-(8).
\24\ The SEC's Rule 2a-7 adopting release describes the new
weighted average life maturity calculation as being based on the
same methodology as the weighted average maturity determination, but
made without reference to the set of maturity exceptions the rule
permits for certain interest rate readjustments for specified types
of assets under the rule. 17 CFR 270.2a-7(c)(2)(iii). The OCC is
adopting the same maturity calculation, referring to it as the
dollar-weighted average portfolio life maturity. The calculation
bases a security's maturity on its stated final maturity date or,
when relevant, the date of the next demand feature when the fund may
receive payment of principal and interest (such as a put feature).
See 75 FR 10072 (Mar. 4, 2010) at footnote 154 and accompanying
text.
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b. No Assets Grandfathered When Determining Maturity Limits
Two commenters requested that the OCC not include, or
``grandfather'', assets held by STIFs prior to the publication or
effective date of the final rule for purposes of calculating the
proposed 60-day dollar-weighted average portfolio maturity and 120-day
dollar-weighted average portfolio life maturity standards. These
commenters suggested that, if the rule did not
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provide for the grandfathering of STIF assets, national bank STIF
administrators would be required to sell certain STIF portfolio assets
in order to comply with the proposed standards. These commenters
asserted that such a forced sale of STIF assets may not be in the best
interest of STIFs or their account participants.
The final rule does not include grandfathering provisions. OCC
believes that it is possible that a limited number of STIFs may be
required to sell certain portfolio holdings in order to comply with the
revised standards, which could, potentially, decrease the book value of
a STIF. However, allowing these assets to remain in a limited number of
STIFs would continue to expose participants in those STIFs to the
heightened liquidity and credit risks of these assets--risks to which
investors in other STIFs will not be exposed. In addition, the final
rule does not become effective until July 1, 2013, affording affected
banks an extended period during which they can determine the most
appropriate strategy for disposition of these assets.
Section 9.18(b)(4)(iii)(E)
To ensure that banks managing STIFs observe standards designed to
limit the amount of credit and liquidity risk to which participating
accounts in STIFs are exposed, the OCC proposed to require the Plan to
include a provision for the adoption of portfolio and issuer
qualitative standards and concentration restrictions. No comment was
received on this proposed Plan provision and, thus, it is adopted as
proposed without change. The OCC expects bank fiduciaries to identify,
monitor, and manage issuer concentrations and lower quality investment
concentrations, and to implement procedures to perform appropriate due
diligence on all concentration exposures, as part of the bank's risk
management policies and procedures for each STIF. In addition to
standards imposed by applicable law, the portfolio and issuer
qualitative standards and concentration restrictions should take into
consideration market events and any deterioration in an issuer's
financial condition.
Section 9.18(b)(4)(iii)(F)
Many banks process STIF withdrawal requests within a short time
frame, often on the same day that the withdrawal request is received,
which necessitates sufficient liquidity to meet such requests. By
holding illiquid securities, a STIF exposes itself to the risk that it
will be unable to satisfy withdrawal requests promptly without selling
illiquid securities at a loss that, in turn, could impair its ability
to maintain a stable NAV. Moreover, illiquid securities are generally
subject to greater price volatility, exposing the STIF to greater risk
that its mark-to-market value will deviate from its amortized cost
value. To address this concern, the final rule, consistent with the
proposal, requires adoption of liquidity standards that include
provisions to address contingency funding needs.
One commenter requested that the OCC clarify that the phrase
``contingency funding needs'' in the provision refers to contingency
funding of the assets of a STIF, rather than a requirement that the
STIF obtain a line of credit or similar redemption funding arrangement
with a lending institution. It is the OCC's view that the contingency
funding aspect of this requirement does not require a STIF to obtain a
letter of credit or similar arrangement with another party. However,
liquidity standards should include provisions to address contingency
funding needs, delineating policies to manage a range of stress
environments, establishing clear lines of responsibility, and
articulating clear implementation and escalation procedures. An
objective of robust liquidity standards should be to ensure that the
STIF's sources of liquidity are sufficient to fund expected operating
requirements under a reasonable range of contingent events and
scenarios. A STIF Plan's liquidity standards should identify
alternative contingent liquidity resources that can be employed under
adverse liquidity circumstances. The liquidity standards should be
commensurate with a STIF's complexity, risk profile, and scope of
operations. The liquidity funding needs standards should be regularly
tested and updated to ensure they are operationally sound and, as
macroeconomic and institution-specific conditions change, the liquidity
standards of a STIF's Plan should be revised to reflect these changes.
Another commenter suggested that the final rule should adopt the
SEC's Rule 2a-7 prescriptive liquidity standards applicable to MMMFs.
Those standards (1) require a MMMF to hold securities that are
sufficiently liquid to meet reasonably foreseeable shareholder
redemptions and any commitments the MMMF has made to shareholders; (2)
prohibit the acquisition of an illiquid security if the MMMF would have
invested more than 5% of its total assets in illiquid securities; (3)
require the MMMF to maintain a minimum daily liquidity of 10% or more
of total assets; and (4) require the MMMF to maintain a weekly minimum
liquidity of 30% or more of total assets.\25\ As discussed previously,
this final rule, including the requirement that a STIF's Plan adopt
liquidity standards that include provisions to address contingency
funding needs, are informed by the SEC's revisions to Rule 2a-7, but
differ in light of the differences between the MMMF as a publicly-
offered investment product and a STIF, e.g., a bank's fiduciary
responsibility to a STIF and requirements limiting STIF participation
to eligible accounts under the OCC's fiduciary account regulation at 12
CFR part 9.
---------------------------------------------------------------------------
\25\ See 17 CFR 270.2a-7(c)(5).
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For these reasons, the final rule adopts the STIF Plan liquidity
standards provision as proposed without change.
Section 9.18(b)(4)(iii)(G)
Consistent with the proposal, the final rule requires a bank
managing a STIF to adopt shadow pricing procedures.\26\ These
procedures require the bank to calculate the extent of the difference,
if any, between the mark-to-market NAV per participating interest using
available market quotations (or an appropriate substitute that reflects
current market conditions) from the STIF's amortized cost value per
participating interest. In the event the difference exceeds $0.005 per
participating interest,\27\ the bank must take action to reduce
dilution of participating interests or other unfair results to
participating accounts in the STIF, such as ceasing fiduciary account
withdrawals. The shadow pricing procedures must occur at least on a
calendar week basis and more frequently as determined by the bank when
market conditions warrant.
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\26\ Shadow pricing is the process of maintaining two sets of
valuation records--one that reflects the value of a fund's assets at
amortized cost and the other that reflects the market value of the
fund's assets.
\27\ The final rule requires a STIF to operate with a stable NAV
of $1.00 per participating interest as a primary fund objective. If
a STIF has a stable NAV that is different than $1.00 it must adjust
the reference value accordingly.
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One commenter requested that the OCC confirm that a bank
administering a STIF is permitted to decide the most appropriate
actions to protect participating accounts from dilution or other unfair
results if the difference between mark-to-market and amortized cost per
participating interest exceeds $0.005. The OCC notes that the shadow
pricing requirement does not impose any limits or requirements on
actions a bank administering a STIF must take to reduce dilutions of
participating interests or other unfair results to participating
accounts. However, any such actions taken must not impair the safety
and soundness of the bank.
[[Page 61234]]
Another commenter advocated that a difference of $0.005 between
mark-to-market and amortized cost per participating interest is
significant in a low interest rate environment and, therefore, a lower
threshold of difference should apply. The OCC notes that, by the same
logic, a higher threshold of deviation from $1.00 might be appropriate
for higher interest rate environments. However, the OCC believes that
the $0.005 trigger is widely recognized as a threshold of significance
in this arena, and will function effectively as a risk management
benchmark, the meaning of which will be understood by banks and STIF
participants alike.
For these reasons, the proposed STIF shadow pricing procedures are
adopted as final without change.
Section 9.18(b)(4)(iii)(H)
Consistent with the proposal, the final rule requires a bank
managing a STIF to adopt procedures for stress testing the fund's
ability to maintain a stable NAV for participating interests. The final
rule requires the stress tests be conducted at such intervals as an
independent risk manager or a committee responsible for the STIF's
oversight determines to be appropriate and reasonable in light of
current market conditions, but in no case shall the interval be longer
than a calendar month-end basis. The independent risk manager or
committee members must be independent from the STIF's investment
management. The stress testing is to be based upon scenarios (specified
by the bank) that include, but are not limited to, a change in short-
term interest rates; an increase in participating account withdrawals;
a downgrade of or default on portfolio securities; and the widening or
narrowing of spreads between yields on an appropriate benchmark the
fund has selected for overnight interest rates and commercial paper and
other types of securities held by the fund.
The stress testing requirement provides a bank with flexibility to
specify the scenarios or assumptions on which the stress tests are
based, as appropriate to the risk exposures of each STIF. Banks
managing STIFs should, for example, consider procedures that require
the fund to test for the concurrence of multiple hypothetical events,
e.g., where there is a simultaneous increase in interest rates and
substantial withdrawals.\28\
---------------------------------------------------------------------------
\28\ Where stress testing models are relied upon, a bank should
validate the models consistent with the Supervisory Guidance on
Model Risk Management issued by the OCC and the Board of Governors
of the Federal Reserve System. See OCC Bulletin 2011-12 (Apr. 4,
2011).
---------------------------------------------------------------------------
The final rule also requires a stress test report be provided to
the independent risk manager or the committee responsible for the
STIF's oversight. The report must include: (1) The date(s) on which the
testing was performed; (2) the magnitude of each hypothetical event
that would cause the difference between the STIF's mark-to-market NAV
calculated using available market quotations (or appropriate
substitutes which reflect current market conditions) and its NAV per
participating interest calculated using amortized cost to exceed
$0.005; and (3) an assessment by the bank of the STIF's ability to
withstand the events (and concurrent occurrences of those events) that
are reasonably likely to occur within the following year.
In addition, the final rule requires that adverse stress testing
results be reported to the bank's senior risk management that is
independent from the STIF's investment management.
Two commenters asserted that the stress testing methodology should
be left to the discretion of a bank. The requirement that the Plan
adopt procedures for stress testing a STIF's ability to maintain a
stable NAV per participating interest does not specify any stress
testing methodology. However, as proposed, the stress testing provision
requires that the stress testing be based upon hypothetical events that
include, but are not limited to, a change in short-term interest rates,
an increase in participant account withdrawals, a downgrade of or
default on portfolio securities, and the widening or narrowing of
spreads between yields on an appropriate benchmark the STIF has
selected for overnight interest rates and commercial paper and other
types of securities held by the STIF.
These two commenters also suggested that the frequency of stress
testing should be left to the discretion of a bank. The rule requires
stress testing at least on a calendar month-end basis and at such
frequencies as an independent risk manager or a committee responsible
for a STIF's oversight that consists of members independent from the
STIF's investment management determines appropriate and reasonable in
light of current market conditions. Thus, the monthly stress testing
requirement is a floor; independent risk managers or an oversight
committee, consisting of independent members as described in the
proposal, have the discretion to perform more frequent stress testing.
The OCC believes that monthly stress testing is an appropriate, minimum
requirement to enhance a bank's sound management of a STIF.
Finally, one commenter requested that the OCC confirm that the term
``independent risk manager'' used in this provision may include a
person, group, or function designated as an independent risk manager,
but does not need to be a third party service provider. An
``independent risk manager'' is not required to be a third party
service provider. However, as discussed previously, an independent risk
manager (e.g., a person) or a committee (e.g., a group) responsible for
the STIF's oversight must be independent from the STIF's investment
management.
These stress testing procedures will provide banks with a better
understanding of the risks to which STIFs are exposed and will give
banks additional information that can be used for managing those risks.
For these reasons, the proposed stress testing requirement is adopted
as final without change.
Section 9.18(b)(4)(iii)(I)
Consistent with the proposal, the final rule requires banks
managing STIFs to disclose information about fund level portfolio
holdings to STIF participants and to the OCC within five business days
after each calendar month-end. Specifically, the bank is required to
disclose the STIF's total assets under management (securities and other
assets including cash, minus liabilities); the fund's mark-to-market
and amortized cost NAVs, both with and without capital support
agreements; the dollar-weighted average portfolio maturity; and dollar-
weighted average portfolio life maturity as of the last business day of
the prior calendar month. The current STIF Rule does not contain a
similar disclosure requirement.
Also, for each security held by the STIF, as of the last business
day of the prior calendar month, the bank is required to disclose to
STIF participants and to the OCC within five business days after each
calendar month-end at a security level: (1) The name of the issuer; (2)
the category of investment; (3) the Committee on Uniform Securities
Identification Procedures (CUSIP) number or other standard identifier;
(4) the principal amount; (5) the maturity date for purposes of
calculating dollar-weighted average portfolio maturity; (6) the final
legal maturity date (taking into account any maturity date extensions
that may be effected at the option of the issuer) if different from the
maturity date for purposes of calculating dollar-weighted average
portfolio maturity; (7) the coupon or yield; and (8) the amortized cost
value.
[[Page 61235]]
Two commenters addressed the proposal's requirement that banks
managing STIFs disclose fund and security level information to STIF
participants and to the OCC within five business days after each
calendar month-end. One commenter suggested that banks make the
disclosures 30 days after each calendar month-end; the other commenter
suggested 60 days after a calendar month-end. A reason one commenter
cited for the 60-day disclosure delay is to be consistent with the
SEC's MMMF rule disclosures, which were adopted in order to address
concerns about investor confusion and alarm that could result in
redemption requests that could increase deviations in a MMMF's price.
While this concern may be applicable to MMMFs, which are open to retail
investors, STIFs are only available to authorized fiduciary accounts.
Fiduciary account participants are less likely than retail investors to
become confused and alarmed by fund and security level disclosures five
days after each month-end.
One commenter raised concerns related to compiling and filing
accurate fund and security level disclosures within five days after
calendar month-end. However, the OCC believes the information required
to be disclosed is factual, simple, and brief, and, furthermore, is
easily susceptible to electronic tracking and report generation so that
a five-day disclosure requirement will not introduce unreasonable
burden or foster an environment prone to error.
Two commenters suggested that the fund and security level
disclosures should be made electronically to STIF participants and the
OCC. The proposed regulation did not specify the form, e.g., written or
electronic, of disclosure that must be made to STIF participants or the
OCC. Thus, the form of banks' disclosures, including electronic
disclosures, to STIF participants is subject to banks' discretion,
provided that such disclosure is reasonably accessible to STIF
participants, e.g., no less accessible than written paper disclosures
delivered to STIF participants. In order to clarify that banks may make
disclosures and notifications to the OCC's Asset Management Group,
Credit and Market Division, under the final rule in an electronic
format, the final rule removes the OCC's street mailing address from
proposed Sec. 9.18(b)(4)(iii)(I). The OCC will provide guidance to
banks describing the process for making electronic disclosures to the
agency at least 90 days prior to the effective date of the final rule.
Finally, one commenter requested that the final rule use
alternative descriptive language, rather than the term ``STIF
participant'' in this provision. The OCC believes that the term ``STIF
participant'' is a widely understood term of art that banks use in the
administration of STIFs. Furthermore, the OCC received no other
requests from commenters seeking clarification of the term. Thus, the
proposed use of the term ``STIF participant'' in Sec.
9.18(b)(4)(iii)(I) is adopted in the final rule without change.
For the reasons discussed, the OCC adopts the fund and security
level disclosures with one change. As noted, in order to preserve the
flexibility for banks to make electronic disclosures to the OCC, the
final rule removes the OCC's street mailing address from Sec.
9.18(b)(4)(iii)(I).
Section 9.18(b)(4)(iii)(J)
Consistent with the proposal, the final rule requires a bank that
manages a STIF to notify the OCC prior to or within one business day
after certain events. Those events are: (1) Any difference exceeding
$0.0025 between the NAV and the mark-to-market value of a STIF
participating interest based on current market factors; (2) when a STIF
has re-priced its NAV below $0.995 per participating interest; (3) any
withdrawal distribution-in-kind of the STIF's participating interests
or segregation of portfolio participants; (4) any delays or suspensions
in honoring STIF participating interest withdrawal requests; (5) any
decision to formally approve the liquidation, segregation of assets or
portfolios, or some other liquidation of the STIF; and (6) when a
national bank, its affiliate, or any other entity provides a STIF
financial support, including a cash infusion, a credit extension, a
purchase of a defaulted or illiquid asset, or any other form of
financial support in order to maintain a stable NAV per participating
interest.\29\ This requirement to notify the OCC prior to or within one
business day after these limited specific events will permit the OCC to
more effectively supervise STIFs that are experiencing liquidity or
valuation stress.
---------------------------------------------------------------------------
\29\ See Interagency Policy on Banks/Thrifts Providing Financial
Support to Funds Advised by the Banking Organization or its
Affiliates, OCC Bulletin 2004-2 Attachment (Jan. 5, 2004)
(instructing banks that to avoid engaging in unsafe and unsound
banking practices, banks should adopt appropriate policies and
procedures governing routine or emergency transactions with bank
advised investment funds).
---------------------------------------------------------------------------
To comply with this requirement, a bank will have to calculate the
mark-to-market value of a STIF participating interest on a daily basis.
One commenter suggested that the rule permit at least five business
days, rather than one business day, to notify the OCC of liquidity or
valuation stress, in order to provide banks with sufficient time to
gather facts, determine a course of action, and prepare a complete and
clear notification. As previously discussed, banks' proposed
notification prior to or within one business day after limited specific
events will permit the OCC to more effectively supervise STIFs that are
experiencing liquidity or valuation stress. As has been observed from
the recent period of financial market turmoil, liquidity stress events
occur within very short time frames thereby making a five business day
or more lag for banks to provide the OCC with notification contrary to
the agency's obligation to supervise the safety and soundness of banks
that administer STIFs.
One commenter also requested clarification that the notification
required by Sec. 9.18(b)(4)(iii)(J) may be made to the OCC
electronically. Consistent with the prior discussion of Sec.
9.18(b)(4)(iii)(I), the final rule removes the OCC's street mailing
address from proposed Sec. 9.18(b)(4)(iii)(J) and the OCC will provide
guidance to banks describing the process for making electronic
notifications to the agency at least 90 days prior to the effective
date of the final rule.
As discussed previously, the OCC included as part of the reportable
events under the proposed rule any withdrawal distribution-in-kind of
the STIF's participating interests or segregation of portfolio
participants. One commenter asserted that in-kind distributions are not
necessarily an indication that a STIF is experiencing liquidity or
valuation stress. The commenter suggested revising Sec.
9.18(b)(4)(iii)(J)(3) to read ``[a]ny withdrawal distribution in-kind
of the STIF's participating interests or segregation of portfolio
participants, where such action results from the bank's efforts to
reduce dilution of participating interests or other unfair results to
participating accounts in the event the difference calculated pursuant
to paragraph (b)(4)(iii)(G)(1) exceeds $0.005 per participating
interest.'' However, the OCC has decided to adopt the reporting
requirement as originally proposed. While an in-kind distribution is
not necessarily an indicator of stress to a STIF, it, nonetheless, is
an atypical distribution that warrants regulator attention.
For the reasons discussed, the requirement that a bank
administering a STIF notify the OCC prior to or within one business day
after certain specified events is adopted with one minor
[[Page 61236]]
change from the proposal. To make clear that banks may make electronic
notifications to the OCC, the final rule removes the OCC's street
mailing address from Sec. 9.18(b)(4)(iii)(J).
Section 9.18(b)(4)(iii)(K)
The OCC is amending the current rule to require banks managing a
STIF to adopt procedures that, in the event a STIF has re-priced its
NAV below $0.995 per participating interest, the bank managing the STIF
shall calculate, admit, and withdraw the STIF's participating interests
at a price based on the mark-to-market NAV. Currently, the rule creates
an incentive for withdrawal of participating interests if the mark-to-
market NAV falls below the stable NAV because the earlier withdrawals
are more likely to receive the full stable NAV payment. The OCC
proposed this requirement in order to remove this incentive, as once
the NAV is priced below $0.995, all withdrawals of participating
interests will receive the mark-to-market NAV instead of the stable
NAV.
One commenter highlighted language in the OCC proposal requiring
banks to ``calculate, redeem, and sell'' STIF participating interests
at mark-to-market NAV once participating interests in the STIF have
been re-priced below $0.995. This commenter requested clarification
whether the OCC intends to require the bank to begin liquidation of the
STIF once it has re-priced its NAV below $0.995 per participating
interest. The OCC did not intend this language to require a bank to
begin liquidation of a STIF. To provide clarification, Sec.
9.18(b)(4)(iii)(K) has been revised in the final rule to require banks
managing a STIF to adopt procedures that, in the event a STIF has re-
priced its NAV below $0.995 per participating interest, the bank
managing the STIF shall calculate, admit, and withdraw the STIF's
participating interests at a price based on the mark-to-market NAV. Use
of the ``calculate, admit, and withdraw'' language in this provision,
rather than ``calculate, redeem, and sell'', is more consistent with
STIFs' operations and Sec. 9.18 and clarifies that liquidation is not
a required action when a STIF has re-priced its NAV below $0.995 per
participating interest. Other than this change, the proposed provision
is adopted as final.
Section 9.18(b)(4)(iii)(L)
The final rule, consistent with the proposal, requires a bank
managing a STIF to adopt procedures for suspending redemptions and
initiating liquidation of a STIF as a result of redemptions. The OCC's
intent in proposing this requirement was to reduce the vulnerability of
participating accounts to the harmful effects of extraordinary levels
of withdrawals, which can be accomplished to some degree by suspending
withdrawals. These suspensions only will be permitted in limited
circumstances when, as a result of redemption, the bank has: (1)
Determined that the extent of the difference between the STIF's
amortized cost per participating interest and its current mark-to-
market NAV per participating interest may result in material dilution
of participating interests or other unfair results to participating
accounts; (2) formally approved the liquidation of the STIF; and (3)
facilitated the fair and orderly liquidation of the STIF to the benefit
of all STIF participants.
The OCC understands that suspending withdrawals may impose
hardships on fiduciary accounts for which the ability to redeem
participations is an important consideration. Accordingly, the
requirement is limited to permitting suspension in extraordinary
circumstances when there is significant risk of extraordinary
withdrawal activity to the detriment of other participating accounts.
Similar to the discussion in Sec. 9.18(b)(4)(iii)(I), one
commenter requested that Sec. 9.18(b)(4)(iii)(L) use the phrase
``accounts invested in a STIF'' rather than the term ``STIF
participant''. As discussed previously, the OCC believes that the term
``STIF participant'' is a widely understood term of art that banks use
in the administration of STIFs. Additionally, the OCC received no other
requests from commenters seeking clarification of the term. Thus,
proposed Sec. 9.18(b)(4)(iii)(L) is adopted as final rule without
change.
V. Regulatory Analysis
A. Paperwork Reduction Act Analysis
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 the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. In conjunction with the
notice of proposed rulemaking, the OCC submitted the information
collection requirements contained therein to OMB for review. In
accordance with 5 CFR 1320, OMB filed a comment on the PRA submission
instructing the OCC ``* * * to examine public comment in response to
the NPRM and include in the supporting statement of the next
information collection request--to be submitted to OMB at the final
rule stage--a description of how the OCC has responded to any public
comments on the PRA submission, including comments on maximizing the
practical utility of the collection and minimizing the burden.'' The
OCC received no comments on the PRA submission and is resubmitting it
with the issuance of this final rule, as instructed by OMB. The OCC has
resubmitted the information collection requirements in the final rule
to OMB for review and approval under 44 U.S.C. 3506 and 5 CFR part
1320. The information collection requirements are found in Sec. Sec.
9.18(b)(iii)(E)-(L) of the final rule.
No comments concerning PRA were received in response to the notice
of proposed rulemaking. Therefore, the hourly burden estimates for
respondents noted in the proposed rule have not changed. The OCC has an
ongoing interest in your comments.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the agency's functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments should be directed to: Communications Division, Office of
the Comptroller of the Currency, Mailstop 2-3, Attention: 1557-NEW, 250
E Street SW., Washington, DC 20219. In addition, comments may be sent
by fax to (202) 874-5274 or by electronic mail to
regs.comments@occ.treas.gov. You may personally inspect and photocopy
comments at the OCC, 250 E Street SW., Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 874-4700. Upon
arrival, visitors will be required to present valid government-issued
photo identification and to submit to security screening in order to
inspect and photocopy comments.
[[Page 61237]]
Additionally, please send a copy of your comments by mail to: OCC
Desk Officer, 1557-NEW, U.S. Office of Management and Budget, 725 17th
Street NW., 10235, Washington, DC 20503, or by fax to (202)
395-6974.
B. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency
that is issuing a final rule to prepare and make available a final
regulatory flexibility analysis that describes the impact of the final
rule on small entities. 5 U.S.C. 604. However, the RFA provides that an
agency is not required to prepare and make available a final regulatory
flexibility analysis if the agency certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities and publishes its certification and a short, explanatory
statement in the Federal Register along with its final rule. 5 U.S.C.
605(b). For purposes of the RFA and OCC-regulated entities, a ``small
entity'' includes banks, FSAs, and Federal branches and agencies with
assets less than or equal to $175 million and trust companies with
assets less than or equal to $7 million. 13 CFR 121.201.
This final rule will not have a significant economic impact on any
small national banks or Federal branches and agencies or trust
companies, as defined by the RFA. Two small national banks, which are
not a substantial number of the 585 small national banks, and no FSAs
or Federal branches and agencies reported management of STIFs on their
required regulatory reports as of June 30, 2012. Therefore, the OCC
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1532), requires the OCC to prepare a budgetary impact statement before
promulgating a rule that includes a Federal mandate that may result in
the expenditure by state, local, and tribal governments, in the
aggregate, or by the private sector, of $100 million or more in any one
year (adjusted annually for inflation). The OCC has determined that
this final rule will not result in expenditures by state, local, and
tribal governments, or the private sector, of $100 million or more in
any one year. Accordingly, the OCC has not prepared a budgetary impact
statement.
List of Subjects in 12 CFR Part 9
Estates, Investments, National banks, Reporting and recordkeeping
requirements, Trusts and trustees.
For the reasons set forth in the preamble, chapter I of title 12 of
the Code of Federal Regulations is amended as follows:
PART 9--FIDUCIARY ACTIVITIES OF NATIONAL BANKS
0
1. The authority citation for part 9 continues to read as follows:
Authority: 12 U.S.C. 24 (Seventh), 92a, and 93a; 12 U.S.C. 78q,
78q-1, and 78w.
0
2. Section 9.18 is amended by revising paragraph (b)(4)(ii) and by
adding paragraph (b)(4)(iii) to read as follows:
Sec. 9.18 Collective investment funds.
* * * * *
(b) * * *
(4) * * *
(ii) General method of valuation. Except as provided in paragraph
(b)(4)(iii) of this section, a bank shall value each fund asset at
mark-to-market value as of the date set for valuation, unless the bank
cannot readily ascertain mark-to-market value, in which case the bank
shall use a fair value determined in good faith.
(iii) Short-term investment funds (STIFs) method of valuation. A
bank may value a STIF's assets on a cost basis, rather than mark-to-
market value as provided in paragraph (b)(4)(ii) of this section, for
purposes of admissions and withdrawals, if the Plan includes
appropriate provisions, consistent with this part, requiring the STIF
to:
(A) Operate with a stable net asset value of $1.00 per
participating interest as a primary fund objective;
(B) Maintain a dollar-weighted average portfolio maturity of 60
days or less and a dollar-weighted average portfolio life maturity of
120 days or less as determined in the same manner as is required by the
Securities and Exchange Commission pursuant to Rule 2a-7 for money
market mutual funds (17 CFR 270.2a-7);
(C) Accrue on a straight-line or amortized basis the difference
between the cost and anticipated principal receipt on maturity;
(D) Hold the STIF's assets until maturity under usual
circumstances;
(E) Adopt portfolio and issuer qualitative standards and
concentration restrictions;
(F) Adopt liquidity standards that include provisions to address
contingency funding needs;
(G) Adopt shadow pricing procedures that:
(1) Require the bank to calculate the extent of difference, if any,
of the mark-to-market net asset value per participating interest using
available market quotations (or an appropriate substitute that reflects
current market conditions) from the STIF's amortized cost price per
participating interest, at least on a calendar week basis and more
frequently as determined by the bank when market conditions warrant;
and
(2) Require the bank, in the event the difference calculated
pursuant to this subparagraph exceeds $0.005 per participating
interest, to take action to reduce dilution of participating interests
or other unfair results to participating accounts in the STIF;
(H) Adopt procedures for stress testing the STIF's ability to
maintain a stable net asset value per participating interest that shall
provide for:
(1) The periodic stress testing, at least on a calendar month basis
and at such intervals as an independent risk manager or a committee
responsible for the STIF's oversight that consists of members
independent from the STIF's investment management determines
appropriate and reasonable in light of current market conditions;
(2) Stress testing based upon hypothetical events that include, but
are not limited to, a change in short-term interest rates, an increase
in participant account withdrawals, a downgrade of or default on
portfolio securities, and the widening or narrowing of spreads between
yields on an appropriate benchmark the STIF has selected for overnight
interest rates and commercial paper and other types of securities held
by the STIF;
(3) A stress testing report on the results of such testing to be
provided to the independent risk manager or the committee responsible
for the STIF's oversight that consists of members independent from the
STIF's investment management that shall include: the date(s) on which
the testing was performed; the magnitude of each hypothetical event
that would cause the difference between the STIF's mark-to-market net
asset value calculated using available market quotations (or
appropriate substitutes which reflect current market conditions) and
its net asset value per participating interest calculated using
amortized cost to exceed $0.005; and an assessment by the bank of the
STIF's ability to withstand the events (and concurrent occurrences of
those events) that are reasonably likely to occur within the following
year; and
(4) Reporting adverse stress testing results to the bank's senior
risk
[[Page 61238]]
management that is independent from the STIF's investment management.
(I) Adopt procedures that require a bank to disclose to STIF
participants and to the OCC's Asset Management Group, Credit & Market
Risk Division, within five business days after each calendar month-end,
the fund's total assets under management (securities and other assets
including cash, minus liabilities); the fund's mark-to-market and
amortized cost net asset values both with and without capital support
agreements; the dollar-weighted average portfolio maturity; the dollar-
weighted average portfolio life maturity of the STIF as of the last
business day of the prior calendar month; and for each security held by
the STIF as of the last business day of the prior calendar month:
(1) The name of the issuer;
(2) The category of investment;
(3) The Committee on Uniform Securities Identification Procedures
(CUSIP) number or other standard identifier;
(4) The principal amount;
(5) The maturity date for purposes of calculating dollar-weighted
average portfolio maturity;
(6) The final legal maturity date (taking into account any maturity
date extensions that may be effected at the option of the issuer) if
different from the maturity date for purposes of calculating dollar-
weighted average portfolio maturity;
(7) The coupon or yield; and
(8) The amortized cost value;
(J) Adopt procedures that require a bank that administers a STIF to
notify the OCC's Asset Management Group, Credit & Market Risk Division,
prior to or within one business day thereafter of the following:
(1) Any difference exceeding $0.0025 between the net asset value
and the mark-to-market value of a STIF participating interest as
calculated using the method set forth in paragraph (b)(4)(iii)(G)(1) of
this section;
(2) When a STIF has re-priced its net asset value below $0.995 per
participating interest;
(3) Any withdrawal distribution-in-kind of the STIF's participating
interests or segregation of portfolio participants;
(4) Any delays or suspensions in honoring STIF participating
interest withdrawal requests;
(5) Any decision to formally approve the liquidation, segregation
of assets or portfolios, or some other liquidation of the STIF; or
(6) In those situations when a bank, its affiliate, or any other
entity provides a STIF financial support, including a cash infusion, a
credit extension, a purchase of a defaulted or illiquid asset, or any
other form of financial support in order to maintain a stable net asset
value per participating interest;
(K) Adopt procedures that in the event a STIF has re-priced its net
asset value below $0.995 per participating interest, the bank
administering the STIF shall calculate, admit, and withdraw the STIF's
participating interests at a price based on the mark-to-market net
asset value; and
(L) Adopt procedures that, in the event a bank suspends or limits
withdrawals and initiates liquidation of the STIF as a result of
redemptions, require the bank to:
(1) Determine that the extent of the difference between the STIF's
amortized cost per participating interest and its mark-to-market net
asset value per participating interest may result in material dilution
of participating interests or other unfair results to participating
accounts;
(2) Formally approve the liquidation of the STIF; and
(3) Facilitate the fair and orderly liquidation of the STIF to the
benefit of all STIF participants.
* * * * *
Dated: September 26, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-24375 Filed 10-5-12; 8:45 am]
BILLING CODE 4810-33-P