[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Proposed Rules]
[Pages 63428-63433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22017]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / 
Proposed Rules

[[Page 63428]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 7

[Docket ID OCC-2016-0022]
RIN 1557-AD93


Industrial and Commercial Metals

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The OCC is proposing to prohibit national banks and federal 
savings associations from dealing and investing in industrial and 
commercial metal.

DATES: You must submit comments by November 14, 2016.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments 
through the Federal eRulemaking Portal or email, if possible. Please 
use the title ``Industrial and Commercial Metals'' 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 
www.regulations.gov. Enter ``Docket ID OCC-2016-0022'' in the Search 
Box and click ``Search.'' Click on ``Comment Now'' to submit public 
comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., suite 
3E-218, mail stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
mail stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2016-0022'' in your comment. In general, the 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 include 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 rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2016-0022'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments can be filtered by 
clicking on ``View All'' and then using the filtering tools on the left 
side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. Supporting materials may 
be viewed by clicking on ``Open Docket Folder'' and then clicking on 
``Supporting Documents.'' The docket may be viewed after the close of 
the comment period in the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th 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) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Casey Scott Laxton, Counsel, Beth 
Kirby, Assistant Director, or Ted Dowd, Director, Securities and 
Corporate Practices Division, (202) 649-5510; Carl Kaminski, Special 
Counsel, Legislative and Regulatory Activities Division, (202) 649-
5490.

SUPPLEMENTARY INFORMATION:

I. Background

    A national bank may engage in activities that are part of, or 
incidental to, the business of banking under 12 U.S.C. 24(Seventh). 
Section 24(Seventh) lists several activities that are part of the 
business of banking; for example, it expressly provides that national 
banks may buy and sell exchange, coin, and bullion.
    In addition to these enumerated powers, section 24(Seventh) 
authorizes national banks to exercise all such incidental powers as 
shall be necessary to carry on the business of banking. National banks 
also are authorized to engage in any other activities not expressly 
enumerated in the statute that the Comptroller of the Currency 
reasonably determines are part of the business of banking.\1\
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    \1\ NationsBank of N.C., N.A. v. Var. Ann. Life. Ins. Co., 
(VALIC) 513 U.S. 251, 258-59 (1995).
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    In Interpretive Letter 693,\2\ issued approximately twenty years 
ago, the OCC authorized national banks to buy and sell copper on the 
grounds that trading copper was becoming increasingly similar to 
trading gold, silver, platinum, and palladium. The letter observed that 
copper was traded in liquid markets; that it was traded in a form 
standardized as to weight and purity; and that the bank seeking 
authority to engage in the activity traded copper under policies and 
procedures similar to those that governed trading precious metals. The 
letter concluded that national banks could buy and sell copper under 
the express authority to buy and sell coin and bullion and as part of 
or incidental to the business of banking. The scope of the 
authorization in Interpretive Letter 693 was sufficiently broad to 
permit national banks to buy and sell copper in the form of cathodes, 
which are used for industrial purposes.
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    \2\ 1995 WL 788816 (Nov. 14, 1995).
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    In this notice of proposed rulemaking, the OCC proposes to prohibit 
national banks from dealing and investing in a metal (or alloy), 
including copper, in a form primarily suited to industrial or 
commercial use (industrial or

[[Page 63429]]

commercial metal).\3\ The proposal: (i) Excludes industrial and 
commercial metals from the terms ``exchange,'' ``coin,'' and 
``bullion'' in 12 U.S.C. 24(Seventh); and (ii) provides that dealing or 
investing in them is not part of, or incidental to, the business of 
banking. Examples of metals and alloys in a form primarily suited for 
industrial or commercial use include copper cathodes, aluminum T-bars, 
and gold jewelry. The OCC does not believe that dealing or investing in 
these metals is appropriate for national banks. The proposed rule would 
supersede Interpretive Letter 693.\4\
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    \3\ The OCC considers the definition of industrial or commercial 
metal to include a warehouse receipt for such metal.
    \4\ See Nat'l Cable & Telecomms. Ass'n v. Brand X Internet 
Servs., 545 U.S. 967, 981-82 (2005) (agency reconsiderations of 
prior interpretations entitled to judicial deference so long as the 
agency adequately explains the reasons for the change).
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    The proposed rule also applies to federal savings associations 
(FSA). The Home Owners' Loan Act does not expressly authorize FSAs to 
buy or sell exchange, coin, and bullion.\5\ FSAs do have incidental 
authority to buy and sell precious metals in certain cases and to sell 
gold and silver coins minted by the U.S. Treasury.\6\ However, the OCC 
is not aware of any precedent authorizing FSAs to buy and sell any 
industrial or commercial metal. The OCC does not interpret FSAs' 
incidental powers to buy and sell metals to be broader than those of 
national banks. To avoid doubt, and to further integrate national bank 
and FSA regulations, the proposed rule prohibits FSAs from dealing and 
investing in industrial or commercial metal.\7\
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    \5\ See 12 U.S.C. 1464(c).
    \6\ See, e.g., OTS Op. Ch. Couns. P-2006-1 (Mar. 6, 2006), 2006 
WL 6195026 (engaging in precious metal transactions on behalf of 
customers); Gold Bullion Coin Transactions, 51 FR 34950 (Oct. 1, 
1986); Letter from Jack D. Smith, Deputy General Counsel, Federal 
Home Loan Bank Board, 1988 WL 1021651 (May 18, 1988). All precedents 
(orders, resolutions, determinations, agreements, regulations, 
interpretive rules, interpretations, guidelines, procedures, and 
other advisory materials) made, prescribed, or allowed to become 
effective by the former Office of Thrift Supervision or its Director 
that apply to FSAs remain effective until the OCC modifies, 
terminates, sets aside, or supersedes those precedents. 12 U.S.C. 
5414(b).
    \7\ The proposed rule indirectly applies to federal branches and 
agencies of foreign banks because they operate with the same rights 
and privileges (and subject to the same duties, restrictions, 
penalties, liabilities, conditions, and limitations) as national 
banks. 12 CFR 28.13(a)(1). The proposed rule also indirectly applies 
to insured state banks and state savings associations. See 12 U.S.C. 
1831a, 1831e.
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II. Description of the Proposed Rule

A. Industrial or Commercial Metal Is Not ``Exchange, Coin, and 
Bullion''

    As noted above, the National Bank Act authorizes national banks to 
buy and sell exchange, coin, and bullion. In this notice of proposed 
rulemaking, the OCC is proposing to exclude from the scope of these 
terms metals in a form primarily suited to industrial or commercial 
use.
    Banking Circular 58 (BC-58) \8\ sets forth general guidelines that 
apply to national banks' coin and bullion activities. It defines 
``coin'' as ``coins held for their metallic value which are minted by a 
government, or exact restrikes of such coins minted at a later date by 
or under the authority of the issuing government.'' Contemporaneous OCC 
interpretive letters elaborated that ``coin'' referred only to media of 
exchange.\9\ BC-58 defines ``bullion'' as ``uncoined gold or silver in 
bar or ingot form.'' These definitions do not encompass industrial or 
commercial metal.
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    \8\ BC-58 (Rev.) (Nov. 3, 1981). The OCC published the original 
version in 1974.
    \9\ Interpretive Letter 326 (Jan. 17, 1985), 1985 WL 202590; 
Interpretive Letter 252 (Oct. 26, 1982), 1982 WL 54157; Letter from 
Peter Liebesman, Assistant Director, Legal Advisory Services 
Division (Feb. 18, 1982), 1982 WL 170844. But see Letter from 
Richard V. Fitzgerald, Deputy Chief Counsel (Nov. 4, 1983), 1983 WL 
145720 (concluding that national banks could purchase and sell the 
Department of Treasury's commemorative Olympic coins based on their 
metallic value even though it was unlikely that the coins would be 
used as a medium of exchange).
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    Interpretive letters published after BC-58 interpreted national 
banks' authority to buy coin and bullion to include other precious 
metals, namely platinum and palladium. Consistent with BC-58's 
definition of ``coin,'' the OCC in 1987 found that legal tender 
platinum coins held for their metallic value were ``coin.'' \10\ That 
same letter prohibited dealing in platinum bars. However, in 1991, the 
OCC concluded that market developments warranted treating platinum bars 
as bullion.\11\ The OCC also found trading in platinum bars to be 
incidental to trading in platinum coins.\12\ For similar reasons, the 
OCC concluded palladium was coin and bullion and national banks could 
trade and deal in palladium as part of the business of banking.\13\ In 
support of its position, the OCC noted that the London Platinum and 
Palladium Market had linked platinum and palladium for market making 
and regulatory purposes and that most of the Market's members were 
banks.
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    \10\ Letter from William J. Stolte, Chief National Bank Examiner 
(July 29, 1987), 1987 WL 149775.
    \11\ Interpretive Letter 553 (May 2, 1991), 1991 WL 340660 
(noting that (i) the financial press considered platinum coins and 
bars to be bullion and (ii) a state statute defined ``bullion'' to 
include platinum).
    \12\ Id.
    \13\ Interpretive Letter 685 (Aug. 4, 1995), 1995 WL 550220.
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    However, other interpretive letters recognized that not every 
precious metal is coin or bullion. Jewelry, the OCC determined, is 
not.\14\
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    \14\ See No-Objection Letter 88-8 (May 26, 1988), 1988 WL 284872 
(selling gold and silver jewelry is impermissible general 
merchandising); Letter from Madonna K. Starr, Attorney (Oct. 3, 
1986), 1986 WL 144029 (limited design jewelry is not exchange, coin, 
or bullion).
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    The OCC proposes to conclude that ``exchange, coin, and bullion'' 
does not encompass industrial or commercial metal. The OCC believes 
this conclusion is consistent with the National Bank Act and current 
market practice. For example, in the mid-19th century, when Congress 
passed the National Bank Act, ``bullion'' meant metal suitable for 
coining, not metal suitable for making wires.\15\ The contemporary 
understanding of ``bullion'' is broader--most currency is no longer 
made of precious metal--but the contemporary understanding does 
distinguish bullion from industrial or commercial metal. For example, 
modern bullion markets trade precious metals by the kilogram.\16\ By 
contrast, industrial and commercial metals markets trade base metals in 
quantities suitable for industrial or commercial use.\17\ The following 
table illustrates trading differences between bullion markets and 
industrial or commercial metal markets.
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    \15\ See Act of June 22, 1874, 18 Stat. 202 (authorizing the 
transfer from the U.S. bullion fund of refined gold bars bearing the 
United States stamp of fineness, weight, and value, or bars from any 
melt of foreign coin or bullion of standard equal to or above that 
of the United States); Act of Feb. 12, 1873 Sec.  31, 17 Stat. 429 
(The bullion thus placed in the hands of the melter and refiner 
shall be subjected to the several processes which may be necessary 
to form it into ingots of the legal standard, and of a quality 
suitable for coinage.)
    \16\ See, e.g., London Bullion Market Association, The Good 
Delivery Rules for Gold and Silver Bars 11 (Mar. 2015), available at 
http://www.lbma.org.uk/assets/market/gdl/GD_Rules_15_Final%2020160512.pdf; London Platinum & Palladium 
Market, ``The London/Zurich Good Delivery List,'' http://www.lppm.com/good-delivery/ (visited July 19, 2016).
    \17\ The London Metal Exchange (LME) describes itself as the 
``world centre for the trading of industrial metals--more than three 
quarters of all non-ferrous metal futures business is transacted on 
[its] platforms.'' LME, ``About us,'' http://www.lme.com/about-us 
(visited July 19, 2016). The LME trades aluminum, aluminum alloys, 
copper, lead, nickel, tin, and zinc. LME, ``Metals,'' http://www.lme.com/metals (visited July 19, 2016).

------------------------------------------------------------------------
                 Contract                           Contract size
------------------------------------------------------------------------
                   Industrial/Commercial Metal Markets
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LME physical copper.......................  25,000 kg.

[[Page 63430]]

 
LME copper future.........................  25,000 kg.
COMEX copper future.......................  25,000 lbs. (about 11,340
                                             kg).
SHFE copper future........................  5,000 kg.
LME physical aluminum.....................  25,000 kg.
LME aluminum future.......................  25,000 kg.
COMEX aluminum future.....................  25,000 kg.
SHFE aluminum future......................  5,000 kg.
------------------------------------------------------------------------
                             Bullion Markets
------------------------------------------------------------------------
LBMA physical gold........................  350-430 troy oz. (about 11-
                                             13 kg).
LBMA physical silver......................  750-1100 troy oz. (about 23-
                                             34 kg).
LPPM physical platinum....................  1-6 kg.
LPPM physical palladium...................  1-6 kg.
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Key:
LME: London Metals Exchange.
COMEX: Commodity Exchange.
SHFE: Shanghai Futures Exchange.
LBMA: London Bullion Market Association.
LPPM: London Platinum & Palladium Market.

    In general, gold, silver, platinum, and palladium are bullion today 
because they:
     Trade in troy ounces or grams rather than metric tons; 
\18\
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    \18\ See, e.g., Bloomberg, ``Gold, Silver, and Industrial Metals 
Prices,'' http://www.bloomberg.com/markets/commodities/futures/metals.
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     Trade in pure forms; \19\
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    \19\ See, e.g., London Bullion Market Association, The Good 
Delivery Rules for Gold and Silver Bars 6 (Mar. 2015) (minimum 
fineness for gold is 99.5 percent and for silver is 99.9 percent); 
London Platinum & Palladium Market, ``The London/Zurich Good 
Delivery List,'' http://www.lppm.com/good-delivery/ (minimum 
fineness for platinum and palladium is 99.95 percent).
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     Trade in a form suitable for coining;
     Trade as precious metals in the world's major organized 
markets, including the London bullion markets; and
     Are considered currency by the International Organization 
for Standardization.\20\
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    \20\ ISO 4217 (Aug. 1, 2015), available at http://www.currency-iso.org/dam/downloads/lists/list_one.xls.
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    Gold, silver, platinum, and palladium in industrial or commercial 
form are not exchange, coin, or bullion.

B. Dealing and Investing in Industrial or Commercial Metal Is Neither 
Part of, Nor Incidental to, the Business of Banking

    Interpretive Letter 693 concluded that national banks could buy and 
sell copper (including industrial copper) as a part of or incidental to 
the business of banking. The OCC has reviewed the bases for the 
conclusion in Interpretive Letter 693 that buying and selling 
industrial copper is part of the business of banking, including 
developments in copper markets that followed this letter. For the 
following reasons, the OCC now believes that buying and selling 
copper--or any other metal--in industrial or commercial form for the 
purpose of dealing or investing in that metal is not part of the 
business of banking.
    When the OCC issued Interpretive Letter 693 in 1995, the agency 
noted increasing similarity between transactions involving copper and 
those transactions already conducted by national banks with respect to 
gold, silver, platinum and palladium (precious metals). This increasing 
similarity informed the OCC's view at that time that buying and selling 
copper, including dealing and investing, was part of the business of 
banking. However, copper markets have not increased in similarity to 
precious metal markets.\21\ Instead, as noted in detail above, copper 
is generally traded as a base metal.\22\
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    \21\ Events subsequent to Interpretive Letter 693 have confirmed 
copper's status as a base metal. In 2000, the LME introduced a 
future on a base metal index containing copper, aluminum, lead, 
nickel, tin, and zinc. Then, in 2006, it introduced ``mini'' futures 
for copper, aluminum, and zinc. Similarly, many firms have launched 
exchange-traded funds (ETFs) that invest solely in gold, silver, 
palladium, platinum, or some combination thereof, indicating a 
widespread belief that these metals are a store of value. However, 
there is no copper ETF. Finally, the OCC understands that national 
banks that trade copper treat it as a base metal and trade it 
alongside aluminum and zinc rather than gold and silver.
    \22\ See generally U.S. Senate Permanent Subcommittee on 
Investigations, Wall Street Bank Involvement with Physical 
Commodities 364 (2014) (identifying banks, trading firms, analysts, 
and exchanges that treat copper as a base metal for trading and risk 
management purposes).
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    The OCC believes that dealing and investing in industrial or 
commercial metals, including base and precious metals in this form, is 
not the functional equivalent of dealing and investing in coin and 
bullion. The paradigmatic example of functional equivalence is that a 
lease is in economic substance a secured loan.\23\ But the significant 
differences between dealing in industrial or commercial metals and 
dealing in coin and bullion demonstrate that the former is not, in 
economic substance, the same as the latter. Most importantly, 
industrial and commercial metals trade in base metal markets by the ton 
in cathode or other industrial form, while coin and bullion trade in 
precious metal markets by the troy ounce or kilogram in bar or ingot 
form. In addition, banks' risk management systems distinguish between 
precious metals and base metals.
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    \23\ See M&M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.2d 
1377 (9th Cir. 1977).
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    The OCC has also considered other factors identified in relevant 
precedent for determining whether dealing in or investing in industrial 
or commercial metal is part of the business of banking.\24\ The OCC 
does not believe that analysis under these factors supports a 
conclusion at this time that this activity is part of the business of 
banking. For example, the OCC has not seen evidence that this activity 
strengthens a bank by benefiting its customers or its business.\25\ Nor 
is the OCC aware of any state-chartered banks dealing in or investing 
in industrial or commercial metal.\26\ Indeed, the OCC has not 
identified any precedent authorizing that activity for state banks.
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    \24\ See, e.g., Merchants' Nat'l Bank v. State Nat'l Bank, 77 
U.S. 604, 648 (1871) (holding that national banks could certify 
checks because the activity had ``grown out of the business needs of 
the country.'').
    \25\ Currently, national banks' dealing and investments in 
industrial or commercial metal are limited, suggesting that the 
business needs of the United States economy are not meaningfully 
affected by national banks' dealing in industrial or commercial 
metal. Nor is there evidence that the amount of revenue from 
industrial or commercial metal dealing and investing meaningfully 
improve national banks' financial strength. In any case, the 
prospect for additional revenue alone is not sufficient to deem an 
activity to be part of the business of banking. See VALIC, 513 U.S. 
at 258 n.2. See also No-objection Letter 88-8 (May 26, 1988), 1988 
WL 284872 (concluding that it is impermissible for a national bank 
to make substantial profits from the sale of merchandise).
    \26\ See Colorado Nat'l Bank v. Bedford, 310 U.S. 41, 49-50 
(1940).
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    As described above, under 12 U.S.C. 24 (Seventh), a national bank 
has the power to exercise all such incidental powers as shall be 
necessary to carry on the business of banking. An activity is 
incidental to the business of banking if it is convenient or useful to 
an activity that is part of the business of banking.\27\
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    \27\ Interpretive Letter 1071 (Sept. 6, 2006), 26 OCC Q.J. 46, 
2007 WL 5122909 (citing Arnold Tours, Inc. v. Camp, 472 F.2d 427, 
431-32 (1st Cir. 1972)).
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    The OCC believes that dealing and investing in industrial or 
commercial metal is not incidental to the business of banking. Some 
customers may wish to trade industrial or commercial metal with 
national banks. However, because few banks buy or sell industrial or 
commercial metal in the ordinary course of business, it does not appear 
that dealing or investing in industrial or commercial metal 
significantly enhances national banks' ability to offer banking 
products and services, including those related to precious metals. 
Moreover, dealing and investing in industrial or commercial metal does 
not appear to enable national banks to use capacity acquired for 
banking operations or otherwise avoid economic

[[Page 63431]]

loss or waste. Therefore, the OCC concludes national banks may not deal 
or invest in industrial or commercial metal under their incidental 
powers.

C. Transactions in Industrial or Commercial Metal That May Be 
Permissible

    National banks do have incidental authority to buy and sell 
industrial or commercial metal in limited cases. Buying or selling 
industrial or commercial metal could be incidental to lending 
activities. For example, a mining company could post a copper cathode 
as collateral for a loan. Pursuant to the national bank's authority to 
acquire property in satisfaction of debt previously contracted, the 
bank could seize and then sell the copper to mitigate loan losses if 
the borrower defaulted.\28\ National banks also have incidental 
authority to buy and sell nominal amounts of industrial or commercial 
metal to hedge customer-driven commodity derivatives.\29\ The proposed 
rule would not prohibit these purchases and sales because they are not 
dealing or investing.\30\
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    \28\ Cf. Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (foreclosure 
of a mine); First Nat'l Bank of Parker v. Peavy Elevator Co., 10 
S.D. 167, 170 (1897) (foreclosure of grain seed and subsequent 
sale).
    \29\ Interpretive Letter 684 (Aug. 4, 1995), 1995 WL 550219; OCC 
Bulletin 2015-35, Quantitative Limits on Physical Commodity 
Transactions (Aug. 4, 2015) (explaining that ``nominal'' means 5 
percent of the bank's short positions in a particular commodity).
    \30\ Cf. First Nat'l Bank v. Nat'l Exch. Bank, 92 U.S. 122, 128 
(1875) (``In the honest exercise of the power to compromise a 
doubtful debt owing to a bank, it can hardly be doubted that stocks 
may be accepted in payment and satisfaction, with a view to their 
subsequent sale or conversion into money so as to make good or 
reduce an anticipated loss. Such a transaction would not amount to a 
dealing in stocks. It was, in effect, so decided in Fleckner v. Bank 
U.S., 8 Wheat. 351 [22 U.S. 338 (1823)], where it was held that a 
prohibition against trading and dealing was nothing more than a 
prohibition against engaging in the ordinary business of buying and 
selling for profit, and did not include purchases resulting from 
ordinary banking transactions.'').
    Similarly, national banks may buy and sell industrial or 
commercial metal as part of their leasing business. 12 U.S.C. 24 
(Seventh); 12 U.S.C. 24 (Tenth); 12 CFR 23.4. A car, for example, 
contains metal in a commercial form, but buying a car to lease it is 
not dealing or investing in commercial metal. Rather, a lease, like 
a reverse repurchase transaction, is a secured loan in a different 
form. National banks may also buy and sell industrial or commercial 
metals to install pipes and electrical wiring in their physical 
premises. 12 U.S.C. 29 (First); 12 CFR 7.1000. This activity is 
clearly not dealing or investing in industrial or commercial metal.
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    The OCC views national banks' lending authority \31\ as including 
buying and selling industrial or commercial metal under reverse 
repurchase agreements that are the functional and economic equivalent 
of secured loans. As described below, a standard reverse repurchase 
agreement for metal used to provide financing to a bank customer 
ordinarily does not indicate dealing or investing in the metal. 
However, the OCC notes that the facts and circumstances of a particular 
transaction may warrant a different conclusion. For example, to the 
extent a reverse repurchase agreement or related activity is structured 
in a way that causes a bank to incur commodity price risk or indicates 
market speculation, the OCC may view the transaction to be dealing or 
investing in the metal.
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    \31\ See 12 U.S.C. 24 (Seventh) (stating that discounting and 
negotiating promissory notes, drafts, bills of exchange, and other 
evidences of debt and loaning money on personal security are part of 
the business of banking).
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    In a reverse repurchase agreement, a bank extends credit by 
simultaneously buying collateral from a client and agreeing to sell the 
collateral back to the client at a future date. The difference between 
the sale and purchase price is effectively the interest the client pays 
for the extension of credit. If the reverse repurchase agreement 
counterparty defaults, the bank can mitigate its losses by selling the 
collateral without first foreclosing on it. Financing customer 
inventory is a traditional bank activity; using reverse repurchase 
agreements rather than loans to provide the financing is merely a 
different way of providing financing.\32\ Financing customer inventory 
using reverse repurchase agreements in itself does not indicate dealing 
or investing in the metal. However, pledging, selling, or 
rehypothecating metal acquired under reverse repurchase agreements 
suggests dealing or investing activity. So, too, does assuming 
commodity price risk. For example, an agreement in which the 
counterparty sells a metal at a certain price to the bank and then 
repurchases the metal at a price that depends on the metal's then-
current market price indicates dealing or investing activity: The bank 
is assuming the metal's price risk. On the other hand, setting the 
repurchase price at the sale price plus a spread based on the time 
value of money is equivalent to a secured loan.
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    \32\ Under the National Bank Act, credit exposures from 
repurchase and reverse repurchase agreements are loans and 
extensions of credit subject to a national bank's lending limits. 12 
U.S.C. 84(b)(1)(C). See also Letter from Charles F. Byrd, Assistant 
Director, Legal Advisory Services Division, [1978-1979 Transfer 
Binder] Fed. Banking L. Rep. (CCH) ] 85,020 (Aug. 30, 1977) 
(repurchase and reverse repurchase agreements are extensions of 
credit subject to 12 U.S.C. 82 (repealed by Garn-St. Germain 
Depository Institutions Act of 1982, Pub. L. 97-320, 402)).
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    The OCC invites comment on the treatment of reverse repurchase 
agreements under the proposed rule. In particular, the OCC seeks 
comment on whether reverse repurchase agreements that do not present 
commodity price risk for a bank and do not indicate market speculation 
are appropriately viewed to not indicate dealing or investing in metal. 
The OCC also seeks comment on whether there are forms of reverse 
purchase agreements or related activities that warrant a determination 
that the activity is dealing or investing in metal. If so, should the 
OCC include such agreements in the final rule's dealing or investing 
prohibition?
    The proposal does not prohibit national banks from buying and 
selling metal through transitory title transfers entered into as part 
of a customer-driven financial intermediation business.\33\ Metal owned 
through a transitory title transfer typically does not entail physical 
possession of a commodity; the ownership occurs solely to facilitate 
the underlying transaction and lasts only for a moment in time. For 
these reasons, the OCC does not consider transitory title transfers to 
be dealing or investing in industrial or commercial metal for purposes 
of this proposal. Interpretive Letter 1073 \34\ provides that national 
banks may hedge metal derivative transactions on a portfolio basis with 
over-the-counter derivative transactions that settle in cash or 
transitory title transfer. Interpretive Letter 1073 also provides that 
a national bank may engage in transitory title transfers in metals for 
the accommodation of customers. The OCC concluded in Interpretive 
Letter 1073 that transitory title transfers involving metals do not 
entail the physical possession of commodities.\35\ The OCC's analysis 
in this letter noted that transitory title transfers do not involve the 
customary activities relating to, or risks attendant to, commodity 
ownership, such as storage costs, insurance, and environmental 
protection. The OCC continues to believe that transitory title 
transfers do not constitute physical possession of commodities and 
therefore does not consider transitory

[[Page 63432]]

title transfers to be dealing or investing in industrial or commercial 
metal for purposes of this proposal.\36\
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    \33\ For purposes of this proposal, the OCC considers a 
transitory title transfer to be back-to-back contracts providing for 
the receipt and immediate transfer of title to the metal. This means 
that a bank holds title to the metal for no more than a legal 
instant. See Interpretive Letter 962 (Apr. 21, 2003), 2003 WL 
21283155 (``[T]ransitory title transfers preclude actual delivery by 
passing title down the chain from the initial seller to the ultimate 
buyer in a series of instantaneous back-to-back transactions. Each 
party in the chain has title for an instant but does not take actual 
physical delivery (other than the ultimate buyer which, in no case, 
will be the Bank.'')).
    \34\ 26 OCC Q.J. 46, 2007 WL 5122911 (Oct. 19, 2006).
    \35\ See also OCC Bulletin 2015-3 (Aug. 4, 2015) (noting that a 
physical commodity that a bank acquired and then immediately sold by 
transitory title transfer would not be included in the bank's 
physical inventory of that commodity).
    \36\ In contrast to transitory title transfers, the OCC 
considers a commodity held by warehouse receipt for more than a 
legal instant to entail physical possession of the commodity. See 
OCC Bulletin 2015-3 (``[A] bank that satisfies certain conditions 
may engage in physical commodity transactions (for example, by 
buying or selling title to a commodity via a warehouse receipt or 
bill of lading) to manage the risks of commodity derivatives.'')); 
Interpretive Letter 684 (August 4, 1995), 1995 WL 550219 
(recognizing physical possession of a commodity by warehouse 
receipt). The OCC notes that the customary activities relating to, 
or risks attendant to, commodity ownership by warehouse receipt are 
distinguishable from those involving transitory title transfer. For 
example, Interpretive Letter 684 provides that the OCC expects a 
bank engaged in physical commodity hedging, either through warehouse 
receipt or ``pass-through'' delivery, to adopt and maintain 
``safeguards designed to manage the risks associated with storing, 
transporting, and disposing of commodities of which the bank has 
taken delivery, including policies and procedures designed to ensure 
that the bank has adequate levels of insurance (including insurance 
for environmental liabilities) which, after deductions, are 
commensurate with the risks assumed.''
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    Notwithstanding the above, the OCC may consider alternative 
approaches for transitory title transfers in the final rule if it 
determines that these transactions present risks similar to holding 
physical metal. The OCC invites comment on whether it should continue 
to view transitory title transfers as transactions that do not entail 
physical possession of a commodity. In particular, the OCC seeks 
comment on whether transitory title transfers involving metals present 
risks that warrant treating such transactions as physical holdings. If 
so, then the prohibition on dealing and investing in industrial or 
commercial metal would apply to metals bought or sold by transitory 
title transfer.\37\
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    \37\ The OCC notes that even if it determines that a transitory 
title transfer entails physical possession of a commodity, national 
banks engaged in a customer-driven financial intermediation business 
could still enter into such transactions under the proposal, 
provided the transaction is a hedge and is nominal.
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III. Request for Comment

    The OCC invites comment on all aspects of this proposal, including 
the questions in part II.C of this Supplementary Information.
    In addition, the OCC requests comment on the appropriate treatment 
of existing holdings of industrial or commercial metal. In other 
contexts, the OCC provides five years to divest nonconforming assets, 
with the possibility of a five-year extension. Are there reasons a 
similar approach would not work here? Are there compelling reasons to 
grandfather existing holdings indefinitely?

IV. Regulatory Analysis

Paperwork Reduction Act

    Under the Paperwork Reduction Act, 44 U.S.C. 3501-3520, the OCC may 
not conduct or sponsor, and a person is not required to respond to, an 
information collection unless the information collection displays a 
valid Office of Management and Budget (OMB) control number. This notice 
of proposed rulemaking does not introduce any new collections of 
information, therefore, it does not require a submission to OMB.

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency, in connection with a proposed rule, to prepare an 
Initial Regulatory Flexibility Analysis describing the impact of the 
proposed rule on small entities (defined by the Small Business 
Administration (SBA) for purposes of the RFA to include banking 
entities with total assets of $550 million or less) or to certify that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities.
    As of December 31, 2015, the OCC supervised 1,032 small 
entities.\38\ Although the rule applies to all OCC-supervised small 
entities, and thus affects a substantial number of small entities, no 
small entities supervised by the OCC currently buy or sell metal in a 
physical form primarily suited to commercial or industrial use for the 
purpose of dealing or investing in that metal. Thus, the rule will not 
have a substantial impact on any OCC-supervised small entities.
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    \38\ The OCC calculated the number of small entities using the 
SBA's size thresholds for commercial banks and savings institutions, 
and trust companies, which are $550 million and $38.5 million, 
respectively. Consistent with the General Principles of Affiliation, 
13 CFR 121.103(a), the OCC counted the assets of affiliated 
financial institutions when determining whether to classify a 
national bank or federal savings association as a small entity. The 
OCC used December 31, 2015, to determine size because a ``financial 
institution's assets are determined by averaging the assets reported 
on its four quarterly financial statements for the preceding year.'' 
See footnote 8 of the SBA's Table of Size Standards.
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    Therefore, the OCC certifies that the proposed rule would not have 
a significant economic impact on a substantial number of OCC-supervised 
small entities.

Unfunded Mandates Reform Act of 1995 Determination

    The OCC analyzed the proposed rule under the factors set forth in 
the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the proposed rule 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).
    Although the proposed rule would apply to all OCC-supervised 
institutions, very few of these institutions are currently involved in 
activities involving dealing or investing in copper or other metals in 
a physical form primarily suited to commercial or industrial use.
    While the proposed rule may prevent OCC-supervised institutions 
from realizing potential gains from prohibited investments in physical 
metals, the proposed rule also may protect them from realizing 
potential losses from investments in physical metals. The OCC is not 
able to estimate these potential gains or losses because they will 
depend on future fluctuations in the prices of the various physical 
metals. However, the OCC does expect OCC-supervised institutions to be 
able to achieve comparable returns in alternative non-prohibited 
investment opportunities. Thus, the OCC estimates that the opportunity 
cost of the proposed rule will be near zero.
    The proposed rule may impose one-time costs on affected 
institutions with respect to the disposal of current physical metal 
inventory that a bank may not deal in or invest in under the rule. This 
cost will depend to some extent on the amount of physical metal 
inventory that affected institutions must dispose of. However, a 
gradual sell-off should not affect market prices and the affected 
institutions would receive fair value for their metals. Under these 
circumstances, the OCC estimates that the disposal costs will also be 
minimal.
    Finally, by establishing that buying and selling physical metal in 
commercial or industrial form is generally not part of the business of 
banking, the rule implies that customers of OCC-supervised institutions 
will have to identify another reliable source of supply of physical 
metals and that OCC-supervised institutions will be less able to 
compete with non-bank metals dealers. Given how technology has made the 
physical metals markets more accessible, the OCC expects bank customers 
will face minimal costs associated with identifying another supplier of 
physical metals. The OCC also expects that losing the ability to 
compete with non-bank metal dealers will not significantly detract from 
the strength of OCC-supervised institutions, especially given that the 
proposed rule would recognize several business-of-

[[Page 63433]]

banking exceptions to the prohibition on buying and selling physical 
metal.
    For the reasons described above, the OCC has determined that the 
proposed rule would not result in expenditures by state, local, and 
Tribal governments, or by the private sector, of $100 million or more. 
Accordingly, the OCC has not prepared a written statement to accompany 
the proposed rule.

List of subjects in 12 CFR Part 7

    Banks, banking, Computer technology, Credit, Federal savings 
associations, Insurance, Investments, Metals, National banks, Reporting 
and recordkeeping requirements, Securities, Surety bonds.

    For the reasons set forth in the preamble, OCC proposes to amend 12 
CFR part 7 as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 is amended to read as follows:

    Authority:  12 U.S.C. 1 et seq., 25b, 71, 71a, 92, 92a, 93, 93a, 
371, 371a, 481, 484, 1463, 1464, 1818, and 5412(b)(2)(B).

0
2. Add Sec.  7.1022 to subpart A to read as follows:


Sec.  7.1022  National bank authority to buy and sell exchange, coin, 
and bullion.

    (a) In this section, industrial or commercial metal means metal 
(including an alloy) in a physical form primarily suited to industrial 
or commercial use, for example, copper cathodes.
    (b) Scope of authorization. Section 24 (Seventh) of the National 
Bank Act authorizes national banks to buy and sell exchange, coin, and 
bullion. Industrial or commercial metal is not exchange, coin, and 
bullion within the meaning of this authorization.
    (c) Buying and selling metal as part of or incidental to the 
business of banking. Section 24 (Seventh) authorizes national banks to 
engage in activities that are part of, or incidental to, the business 
of banking. Buying and selling industrial or commercial metal for the 
purpose of dealing or investing in that metal is not part of or 
incidental to the business of banking pursuant to section 24 (Seventh).
    (d) Other authorities not affected. This section shall not be 
construed to preclude a national bank from acquiring or selling metal 
in connection with its incidental authority to foreclose on loan 
collateral, compromise doubtful claims, or avoid loss in connection 
with a debt previously contracted. This section also shall not be 
construed to preclude a national bank from buying and selling physical 
metal to hedge a derivative for which that metal is the reference asset 
so long as the amount of the physical metal used for hedging purposes 
is nominal.
0
3. Add Sec.  7.1023 to subpart A to read as follows:


Sec.  7.1023  Federal savings associations, prohibition on industrial 
or commercial metal dealing or investing.

    (a) In this section, industrial or commercial metal means metal 
(including an alloy) in a physical form primarily suited to industrial 
or commercial use, for example, copper cathodes.
    (b) Federal savings associations may not deal or invest in 
industrial or commercial metal. Federal savings associations may not 
buy or sell industrial or commercial metal if the purchase or sale is 
impermissible for a national bank.

    Dated: September 7, 2016
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2016-22017 Filed 9-14-16; 8:45 am]
 BILLING CODE 4810-33-P